Unexpected events like natural disasters, accidents, or crime can turn your world upside down. Casualty and theft losses are significant financial impacts caused by unforeseen events, which must meet specific criteria to be tax-deductible. A casualty loss must occur from an unexpected situation, while theft losses require evidence that property was stolen rather than lost. These losses can result from various causes, including fire, theft, hurricanes, floods, earthquakes, and other sudden occurrences.
What qualifies as a casualty loss deduction?
The IRS defines a casualty loss as a loss of property due to a sudden, unexpected event that causes damage, destruction, or loss of use. Deductible casualty losses can come from events like:
- Natural disasters (floods, tornados, hurricanes, and earthquakes)
- Car accidents (if you are not at fault)
- Government ordered demolition
- Fires
- Mine cave-ins
- Shipwrecks
- Sonic booms
- Terrorist attacks
- Vandalism
- Volcanic eruptions
What does not qualify as a casualty loss deduction?
Not all losses qualify for this deduction. Here are some examples that do not qualify:
- Termite damage
- Car accident (if your willful negligence or willful act caused it)
- Normal wear and tear
- Accidental breaking under normal conditions
- Fires (if you willfully set it or pay someone else)
- Progressive deterioration
How to deduct a qualified disaster loss
A qualified disaster loss refers to losses due to a federally declared qualified disaster. The loss is calculated by looking at how much the property’s value dropped before and after the event, then subtracting any insurance money or other compensation received. For example, if your total loss is $10,000 and you received $4,000 in compensation, your deductible loss would be $6,000.
What is a qualified disaster?
Federal and state emergency management agencies, like FEMA, announce whether an area affected by a natural disaster qualifies as a federally declared disaster zone. Also, the IRS provides updates by listing the specific areas impacted and the types of disasters that qualify for tax relief.
If you’re in a federally declared disaster area, you may qualify for automatic extensions to file your tax return. You might be eligible for other tax relief options, such as the ability to claim disaster-related losses on your tax return or to access retirement funds without penalties for disaster recovery.
What qualifies as a theft loss?
The IRS defines theft loss as the taking or removing property or money. To qualify as a theft loss, the property must have been taken unlawfully, with no intention of returning it to the owner. It must also be illegal under the state law that it happened and done with criminal intent. Some examples of theft loss include:
- Blackmail
- Burglary
- Embezzlement
- Extortion
- Fraud
- Kidnapping
- Larceny
- Robbery
What does not qualify as a theft loss?
You can’t claim a theft loss for lost or misplaced property. Personal items damaged or destroyed in a natural disaster are not considered theft losses.
If you try to claim something that doesn’t qualify as a theft loss, the IRS may reject your deductions – resulting in tax return adjustments, penalties, or interest on owed taxes.
How to report a casualty and theft loss
If you’re claiming casualty or theft loss, you will need to fill out Form 4684. For casualty losses, keep track of quotes, receipts, and appraisals that went toward any repairs and improvements of the property due to the disaster. Theft losses typically require evidence that the property was stolen and not lost or misplaced.
To calculate your deduction for a casualty or theft loss, first determine your loss amount using these steps:
1. Find your adjusted basis in the property before the loss or theft
2. Determine the decrease in the property’s fair market value
3. Subtract any insurance or reimbursements from the smaller amount from steps 1 and 2
Casualty and theft loss considerations for income-producing property
You can no longer claim miscellaneous itemized deductions, meaning business casualty and theft losses related to property used for work cannot be deducted or offset against gains. Business losses are connected to how a business runs and can impact the taxes the business has to pay. To calculate the loss, subtract the salvage value and any insurance reimbursement from the property’s adjusted basis. This will be reported on Form 4684, Section B.
