What is a casualty loss?
A casualty loss results from a sudden, unexpected or unusual event. In computing casualty losses, it is necessary to determine the type of property involved since the tax treatments for personal property and business-use property differ.
How does someone claim a qualified personal casualty loss?
A casualty loss deduction for non-business property is claimed as an itemized deduction. Casualty losses can be deducted either: (1) on the original return for the year of the loss, or (2) on an amended return filed for the tax year immediately preceding the year in which the disaster occurred (Sec. 165(i)(1)). Victims should consider reducing their remaining current-year estimated tax payments or withholding in anticipation of a current-year casualty loss deduction.
Can a taxpayer deduct a personal casualty loss?
To deduct a casualty loss, the taxpayer must first calculate the loss and then determine any limits on the amount of the loss that may be deducted.
Claiming the Loss
Individuals may claim their casualty and theft losses as an itemized deduction on Schedule A. For property held by you for personal use, you must subtract $100 from each casualty or theft event that occurred during the year after you’ve subtracted any salvage value and any insurance or other reimbursement. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year.
If you have a qualified disaster loss you may elect to deduct the loss without itemizing your deductions. Your net casualty loss doesn’t need to exceed 10% of your adjusted gross income to qualify for the deduction, but you would reduce each casualty loss by $500 after any salvage value and any other reimbursement. Hurricane Ian should qualify as a qualified disaster loss, although he IRS instructions have not been updated yet.
How does a taxpayer determine the amount of the casualty loss?
A casualty loss is calculated by subtracting any insurance or other reimbursement received or expected from the smaller of the decrease in fair market value (FMV) of the property as a result of the casualty or the adjusted basis in the property before the event (Regs. Sec. 1.165-7(b)(1)).
How is the decrease in FMV determined?
The decrease in FMV is the difference between the property’s value immediately before and after the casualty (Regs. Sec. 1.165-7(b)(1)(i)).
To calculate the decrease in FMV caused by a casualty, determine the actual price that the property could have sold for immediately before and after the loss. The worksheets in IRS Publication 584, Casualty, Disaster and Theft Loss Workbook, and IRS Publication 584B, Business Casualty, Disaster and Theft Loss Workbook, provide assistance with the loss calculation.
The IRS issued Rev. Proc. 2018-08 and Rev. Proc. 2018-09 to provide safe harbors for the calculation of the decline in the FMV of the property.
Find guidance for estimating real property casualty losses in the FAQs of SSTS No. 4, Use of Estimates – Casualty Losses of Real and Personal Property.
How is the adjusted basis determined?
The basis for casualty loss purposes is the same as the basis that would be used for calculating gain or loss on the sale of the property. Various events may take place that change the basis of ownership during the period the property is owned. Some events, such as additions or permanent improvements to the property, increase the basis. IRS Publication 551, Basis of Assets, provides more information on calculating basis.
How does insurance and other reimbursements affect the calculation of the casualty loss?
Only losses that exceed what was reimbursed by insurance are deductible. If the reimbursement exceeds the tentative loss, the taxpayer may have taxable income. If the property is covered by insurance, file a timely insurance claim for reimbursement of a loss. Otherwise, no deduction as a casualty loss is allowed.
What changes related to casualty losses resulted from the Tax Cuts and Jobs Act?
For tax years beginning after Dec. 31, 2017, and ending before Jan. 1, 2026, personal casualty losses will be allowed as a deduction only to the extent they are attributable to a federally declared disaster (Sec. 165(h)(5)). The president of the United States makes the determination on the federally declared disaster by determining that the area warrants assistance by the federal government.