Casualty Loss Deduction for Damage to Your Principal Residence

You can claim a casualty loss deduction for damage to your principal residence when the damage came from a sudden, unusual event in an area covered by a federal or, starting in 2026, state disaster declaration. The One Big Beautiful Bill Act made the deduction permanent and expanded it to include certain state-declared disasters.¹ The amount you can actually write off is reduced by any insurance you received, a $500 per-event floor, and 10% of your adjusted gross income, unless the loss qualifies for the more generous “qualified disaster loss” rules.

What Kind of Damage Qualifies

A casualty is damage from something sudden, unexpected, and unusual: fire, storm, earthquake, tornado, flood, volcanic eruption, vandalism. The event has to strike quickly rather than unfold over weeks or months.

Slow, progressive damage does not qualify. Termites, mold, rust, erosion, and ordinary wear and tear are all off the table. A pipe that bursts during a freeze counts; a pipe that corrodes and leaks for months does not. This distinction trips up more homeowners than any other part of the rule, so when the timing is unclear, ask whether the damage happened over hours or over seasons.

Your Damage Has to Be Tied to a Disaster Declaration

Even genuinely sudden damage is only deductible if it happened in an area covered by a federal or state disaster declaration. The federal-only version of this rule has been in place since 2018, and the One Big Beautiful Bill Act made it permanent while adding state declarations starting in 2026.¹

A federally declared disaster is one the President determines warrants federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, covering both major disaster and emergency declarations.² FEMA maintains the list, and each declaration has a specific number you will need on your return. If a tree falls on your roof during an ordinary thunderstorm that no one declared a disaster, the loss is not deductible, no matter how bad it looks.

You Have to File an Insurance Claim

If you carry homeowner’s insurance, you must file a timely claim for the covered portion of the damage before you can deduct any of it. The tax code specifically disallows the insured portion of a personal casualty loss when no claim was filed.² Skipping the claim to protect your premium costs you the deduction on that piece too. Only the uninsured excess is potentially deductible.

How the Deduction Is Calculated

The calculation runs in four steps, and each one shrinks the number.

Step 1: Figure Your Starting Loss

The initial loss is the lesser of two figures: the decrease in your home’s fair market value caused by the event, or the adjusted basis of your home immediately before the damage.³ Adjusted basis is generally what you paid for the property plus permanent improvements, minus any depreciation or earlier casualty deductions. For personal-use residential property, the house, land, and landscaping are treated as one item.

The drop in fair market value is normally established through a professional appraisal of the property before and after. If a formal appraisal is not practical, you can use the actual cost of repairs as a proxy, but only if the repairs were completed, restored the property to its pre-casualty condition without making it more valuable, addressed only the casualty damage, and were not excessive.³

Step 2: Subtract Reimbursements

Reduce that starting loss by every dollar of compensation you received or expect to receive: insurance payouts, FEMA grants, salvage value, private assistance. What is left is your net loss for the event.

Step 3: Take Off $500 Per Event

Each separate casualty event is then reduced by $500.⁴ One storm that hits both your house and your car is one event, so the $500 comes off once. Two storms in the same year mean two separate $500 reductions.

Step 4: Subtract 10% of Your AGI

Add up all your per-event net losses for the year and subtract 10% of your adjusted gross income. Only the amount above that threshold is deductible.³

Say your AGI is $90,000 and your net loss after the $500 floor comes to $20,000. The first $9,000 is absorbed by the AGI threshold, and your deduction is $11,000. This threshold is why the deduction is really only useful when the loss is large relative to your income.

Qualified Disaster Losses Get Better Treatment

Losses from certain federally declared disasters are treated as “qualified disaster losses,” a category the One Big Beautiful Bill Act made permanent.¹ If your loss falls in this bucket, three things change:

No 10% AGI threshold. Your full net loss after the $500 floor is deductible regardless of your income.³
No itemizing required. You can claim the deduction even while taking the standard deduction. The qualified disaster loss gets added to your standard deduction on Schedule A, effectively increasing it.³
Prior-year election available. You can deduct the loss on the return for the tax year before the disaster, which can put a refund in your hands faster.

For scale, the 2026 standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.⁵ Without the qualified disaster loss rule, a regular casualty deduction only helps if your total itemized deductions clear those numbers. Stacking a qualified disaster loss on top of the standard deduction is a real benefit that plenty of taxpayers overlook.

How to File It

Personal casualty losses go on Section A of Form 4684, Casualties and Thefts.⁶ File a separate Form 4684 for each distinct event. At the top, you check a box indicating the loss is tied to a disaster declaration and enter the FEMA declaration number or the applicable state identifier. That number is what the IRS uses to validate eligibility.

The form walks through the calculation: enter the lesser of adjusted basis or the fair market value decrease, subtract insurance and other reimbursements, subtract the $500 floor. The per-event amounts combine on a single form, where the 10% AGI reduction applies (unless it is a qualified disaster loss). The final figure flows to Schedule A of your Form 1040.

Claiming the Loss on Your Prior-Year Return

For damage in a federally declared disaster area, you can choose to deduct the loss on the return for the year immediately before the disaster.⁶ A disaster hitting in March 2026 could go on your 2025 return. Make the election by completing Section D of Form 4684 and attaching it to the prior-year return or an amended return.

The deadline is six months after the regular due date (without extensions) of the disaster-year return.⁷ For most individuals that means October 15 of the year after the disaster. Miss it and you are stuck deducting the loss in the disaster year itself.

When Insurance Pays More Than Your Basis

Sometimes the tax problem runs the other way. Your insurance payout exceeds your home’s adjusted basis, producing a taxable gain rather than a loss. This is common with older homes that have appreciated well beyond a low original purchase price. The tax code treats it as an involuntary conversion under Section 1033.⁸

The gain is taxable in the year you receive the proceeds unless you reinvest in a replacement home. Spend at least as much on a rebuilt or replacement principal residence as you received in proceeds, and you defer the entire gain. Spend less, and you owe tax only on the portion you did not reinvest.

The normal replacement window is two years from the end of the tax year in which you first realized the gain. For a principal residence destroyed in a federally declared disaster area, that window extends to four years, which matters because rebuilding in a disaster zone routinely runs past two years due to contractor shortages and permitting delays. Insurance proceeds for unscheduled personal property (the belongings covered under your homeowner’s policy without being individually listed) are fully tax-free when a federally declared disaster destroys your home, regardless of whether you replace those items.⁸

1
Internal Revenue Service. Casualty Loss Deduction Expanded and Made Permanent
2
Office of the Law Revision Counsel. 26 US Code 165 – Losses
3
Internal Revenue Service. Publication 547 – Casualties, Disasters, and Thefts
4
GovInfo. 26 USC 165 – Losses
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Internal Revenue Service. Instructions for Form 4684
7
Internal Revenue Service. FAQs for Disaster Victims
8
Office of the Law Revision Counsel. 26 USC 1033 – Involuntary Conversions