IRS Pub 547: Disaster Losses, Form 4684, and the 10% AGI Floor

IRS Publication 547 governs casualty and theft loss deductions, and the rules narrowed sharply in 2018: if the damaged or stolen property was for personal use, you can deduct the loss only if it came from a federally declared disaster. Business and income-producing property are not subject to that restriction. Whatever the property type, the deduction is built the same way: take the smaller of your adjusted basis or the drop in fair market value, subtract any insurance or other recovery, and then, for personal losses, subtract $100 per event and 10% of your adjusted gross income.

What Counts as a Casualty or a Theft

A casualty is damage from an event that is sudden, unexpected, and unusual. Hurricanes, tornadoes, earthquakes, fires, floods, volcanic eruptions, and vandalism all qualify. Gradual damage does not: termite infestation, rust, erosion, and ordinary wear are excluded because the event has to be identifiable and abrupt rather than something that unfolded over weeks or months.¹

A theft is the illegal taking of your money or property, covering robbery, burglary, embezzlement, extortion, and similar crimes. The taking has to be illegal where it occurred, and you need to be able to show it actually happened. You claim a theft loss in the year you discover it, not the year it occurred.²

Accidental breakage from routine carelessness, misplaced items, and damage from a family pet generally do not qualify as either.

The Federally Declared Disaster Rule for Personal Property

This rule is where most personal deductions die. Since 2018, a personal casualty or theft loss is deductible only if it results from a federally declared disaster. A house fire caused by lightning in an area that receives a presidential disaster declaration qualifies. The same fire in a neighborhood without that declaration does not. The One Big Beautiful Bill Act made this restriction permanent and, beginning in 2026, expanded eligibility to include state-declared disasters that are also recognized by the Secretary of the Treasury.³

Business and income-producing property are exempt. A fire that destroys equipment used in your trade, or a rental property you own, produces a deductible loss regardless of any disaster declaration.⁴

There is one narrow carve-out for personal losses outside a declared disaster. If you have personal casualty gains in the same year, meaning insurance paid you more than your adjusted basis in some other destroyed property, you can deduct non-disaster personal casualty losses up to the amount of those gains. In practice, this helps mostly people who over-insured items or whose property had appreciated far above its original cost.³

How to Calculate the Loss

Start with the smaller of two numbers: your adjusted basis in the property, or the drop in fair market value caused by the event. Compare the property’s value immediately before the casualty to its value immediately after. Whichever is smaller, basis or decrease, is your starting loss figure. You can never deduct more than you actually invested in the property.²

For thefts, the after-event fair market value is zero because the property is gone, so the loss equals your adjusted basis minus any recoveries.²

Figuring Adjusted Basis

Adjusted basis is generally what you paid for the property, plus the cost of permanent improvements, minus any depreciation claimed. For a residence, that means the purchase price plus additions like a new roof or finished basement. For business property, subtract accumulated depreciation. Without purchase records and improvement receipts, you may not be able to establish basis at all.

Proving the Drop in Fair Market Value

Establishing the lost value is often the hardest part. The IRS accepts a competent appraisal from someone qualified to value the property type involved. Repair costs can stand in for the fair market value decrease, but only if the repairs do nothing more than restore the property to its pre-casualty condition, the cost is not excessive, and the property is not worth more after the repairs than it was before the event.¹

Safe Harbor Methods for Personal Residences

Formal appraisals get expensive and hard to arrange when every homeowner in the area needs one. Revenue Procedure 2018-08 offers IRS-approved shortcuts for personal-use residential property that the agency will not challenge if used correctly:⁵

Repair cost method: a reliable estimate of what fixing the damage would cost, used as a proxy for the fair market value decrease.
De minimis method: a simplified calculation for smaller losses that avoids the need for a full appraisal.
Insurance method: the value the insurance company assigned to the damage.
Contractor method: for federally declared disasters, a written contractor estimate.
Disaster loan appraisal method: also limited to declared disasters, using the appraisal prepared for a federal disaster loan.

None of these are mandatory; a traditional appraisal is always an option. If you do use a safe harbor, you must account for no-cost repairs such as volunteer cleanup or donated materials, which reduce the deductible loss.⁵

Subtract Insurance and Other Recoveries

Any reimbursement reduces your deductible loss dollar for dollar. Insurance payouts, government disaster grants, employer aid, salvage value, and legal settlements all count.¹

The common trap: if your property is insured and you do not file a timely claim, you cannot deduct the portion the policy would have covered. The IRS treats available-but-unclaimed insurance as if you had received it. Only the portion of the loss outside your policy coverage is potentially deductible.⁶

If a claim is still pending at year-end and you have a reasonable prospect of recovery, you must reduce the loss by the expected payment. You cannot deduct now and settle up later. If the final payout comes in below your estimate, you deduct the shortfall in the year the amount becomes certain. If it comes in higher, you report the excess as income that year.¹

The $100 Floor and the 10% AGI Threshold

Two statutory reductions apply only to personal-use property. Business losses skip both.

First, subtract $100 from each casualty or theft event. One storm that damages your car, your roof, and your fence counts as one event with one $100 reduction, not three. This floor keeps minor losses out of the system.²

Second, add up all personal casualty losses for the year after the per-event reductions and subtract 10% of your adjusted gross income. Only the amount above that threshold is deductible. If your AGI is $80,000, the first $8,000 of net personal casualty losses produces no deduction.³

Qualified Disaster Losses

Losses from certain congressionally designated disasters get better treatment. For a qualified disaster loss, the per-event floor rises to $500 but the 10% AGI threshold is waived entirely. That can make a dramatic difference for higher-income taxpayers whose AGI floor would otherwise consume most of the deduction. Qualified disaster losses can also be added to the standard deduction, so you do not have to itemize to claim them.⁶

Not every federally declared disaster is a qualified disaster. Congress designates specific disasters for this enhanced treatment through legislation that identifies the incident period. The current list appears in the Form 4684 instructions.

Reporting on Form 4684

Every casualty and theft loss starts on Form 4684. Section A is for personal-use property, Section B for business and income-producing property. You enter the fair market value before and after, the adjusted basis, and insurance proceeds, and the form walks through the $100 or $500 floor and the 10% AGI calculation.⁷

Where the result lands depends on property type:

Personal-use property: deductible disaster losses transfer to Schedule A as an itemized deduction. Qualified disaster losses can instead increase the standard deduction.
Business property: losses flow to Form 4797, Sales of Business Property, or to Schedule C for a sole proprietor.
Income-producing property: losses from rental or investment property also go through Form 4797.

For personal losses taken as itemized deductions, the math only helps if your total itemized deductions exceed the standard deduction. For 2026, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.⁸

Claiming a Disaster Loss on the Prior Year’s Return

If your loss occurred in a federally declared disaster area, you can elect to deduct it on the return for the year immediately before the disaster rather than the year it happened. A 2026 disaster loss can be claimed on your 2025 return. The point is speed: amending a prior return gets you a refund faster than waiting to file a future one.³

To make the election, file Form 1040-X for the prior year and attach a completed Form 4684. The loss amount is based on what you know when you file, not the final number, which may still be unsettled while insurance negotiations continue.⁴

Before filing the amendment, check whether the casualty loss would make itemizing worthwhile on that prior return. If you took the standard deduction that year, you would need to switch to itemized deductions, with all your other deductible expenses, for the amendment to pay off, unless the loss is a qualified disaster loss that can increase the standard deduction.⁶

When the Loss Exceeds Your Income

A major casualty can produce a loss larger than all your other income for the year. The excess is not wasted. It becomes a net operating loss you can carry forward against future income, and you do not have to be a business owner to generate one from a casualty. The rules for how long the carryforward lasts and what income it can offset are in IRS Publication 536.²

Records That Hold the Deduction Together

The IRS denies casualty and theft deductions for lack of documentation routinely. You need records that establish four things: the event happened, you owned the property, the property had a specific value before and after, and your insurance did not cover the loss.

For the event, keep police reports for thefts, fire department reports for fires, and weather service records or FEMA declarations for natural disasters. Photographs of the damage taken as soon as possible after the event are invaluable. For federally declared disasters, note the FEMA disaster number and the dates of the incident period.

For ownership and value, keep purchase receipts, deeds, appraisals, repair estimates from licensed contractors, and insurance company assessments. If you use the repair-cost method, get itemized estimates showing the work restores the property rather than improves it.

For insurance, keep your claim filing, correspondence with the insurer, and the final settlement document. If the property was uninsured, document that too. The IRS will want to see that you filed a timely claim when coverage existed, since failing to claim available insurance reduces the deductible loss.⁶

1
Internal Revenue Service. Publication 547 – Casualties, Disasters, and Thefts
2
Internal Revenue Service. Topic No. 515, Casualty, Disaster, and Theft Losses
3
Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses
4
Internal Revenue Service. Instructions for Form 4684
5
Internal Revenue Service. Revenue Procedure 2018-08
6
Internal Revenue Service. Instructions for Form 4684 – Casualties and Thefts
7
Internal Revenue Service. Form 4684 – Casualties and Thefts
8
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026