IRS Publication 547: Casualties, Disasters, and Thefts

IRS Publication 547 is the agency’s plain-language guide to deducting losses when your property is damaged, destroyed, or stolen. It covers what qualifies as a casualty or theft, how to figure the loss, how insurance changes the math, when a casualty can produce a taxable gain instead of a deduction, and how to report everything on Form 4684. Starting with the 2026 tax year, the personal casualty loss deduction is permanently limited to losses from federally declared disasters or state-declared disasters, an expansion of the earlier federal-only rule that still shuts out routine casualties like a burst pipe or a fender-bender.¹

What Counts as a Casualty, Theft, or Disaster

A casualty is damage or destruction of property from an event that is sudden, unexpected, or unusual. Hurricanes, tornadoes, earthquakes, fires, floods, and vandalism all qualify. Gradual damage from termites, rust, erosion, or normal wear and tear does not, no matter how expensive the eventual bill.²

A theft means someone illegally took your money or property with the intent to keep it. Robbery, embezzlement, and fraud all count. The taking has to be a crime under the law where it happened, and you need to be able to show it actually occurred. Simply misplacing something is not a theft.³

A federally declared disaster is a casualty in an area where the President has authorized federal assistance under the Stafford Act. A state-declared disaster, which becomes relevant in 2026, is a natural catastrophe, fire, flood, or explosion that the Governor of the state (or the Mayor of the District of Columbia) and the Secretary of the Treasury jointly determine warrants relief.⁴

Who Can Deduct a Personal Casualty Loss in 2026

If the damaged property was personal-use (your home, car, furniture, or other personal belongings), you can only deduct the loss if it resulted from a federally declared disaster or a state-declared disaster. This limitation began as a temporary rule under the Tax Cuts and Jobs Act for 2018 through 2025 and was made permanent, and broadened to include state declarations, by the One Big Beautiful Bill Act (P.L. 119-21).¹

One exception matters. If you have personal casualty gains during the year (for instance, insurance paid you more than your property’s adjusted basis), you can use non-disaster personal casualty losses to offset those gains even when the loss did not come from a declared disaster.⁴

Business property and income-producing property are not subject to the disaster-only limitation. If a tree falls on your rental property or someone steals equipment from your business, those losses remain deductible under the general rules whether or not any disaster was declared.

How to Figure the Loss

Every casualty or theft loss starts with the smaller of two numbers: your adjusted basis in the property before the event, or the drop in the property’s fair market value caused by the event.³

Adjusted basis is generally what you paid, plus permanent improvements, minus any depreciation you claimed. Buy a home for $250,000, add a $40,000 kitchen, and your adjusted basis is $290,000 (excluding the land, which stays out of the calculation). The decrease in fair market value is what the property was worth right before the casualty minus what it was worth right after.

The IRS accepts the cost of repairs as evidence of the fair market value drop, as long as the repairs only restore the property to its pre-event condition and do not make it more valuable. For larger losses on non-business property, expect to need a before-and-after appraisal from a qualified appraiser.²

For business or income-producing property that is completely destroyed, the loss is generally the adjusted basis minus any salvage value, regardless of the fair market value drop. That distinction often benefits business owners, because the basis of depreciating equipment or structures may exceed the market value loss.

Subtracting Insurance and Other Reimbursements

After figuring the initial loss, subtract any insurance payouts, government disaster payments, salvage value, or other compensation you received or reasonably expect to receive. What’s left is your net loss.²

If your property was covered by insurance and you did not file a claim, the IRS will not let you deduct the portion of the loss that insurance would have covered. Only amounts outside your policy’s coverage (like your deductible) survive. This costs people the deduction more often than you’d think. Not filing a claim can permanently destroy the write-off for a substantial part of the loss.

The $100 and 10% AGI Floors

Personal-use property losses face two extra reductions that business property does not. First, subtract $100 from each separate casualty or theft event. A single storm that damages your roof and your fence is one event with one $100 reduction. A storm in March and a theft in September are two events, each with its own $100 cut.³

Then add up all your personal casualty losses for the year and subtract 10% of your adjusted gross income. Only the excess is deductible. If your AGI is $80,000, your combined losses (after each $100 reduction) must exceed $8,000 before you get any deduction at all. For moderate damage, this floor usually wipes out the benefit entirely.

Congress has occasionally passed enhanced relief for specific qualified disaster losses, raising the per-event floor to $500 while eliminating the 10% AGI threshold and letting taxpayers claim the deduction without itemizing.² Whether these enhanced rules apply depends on the specific disaster legislation in force, so check the Form 4684 instructions for the year of the event.

When a Casualty Produces a Taxable Gain

A casualty or theft can generate a taxable gain when your insurance payout exceeds the adjusted basis of the destroyed or stolen property. It happens more often than people expect, especially with older homes or fully depreciated business equipment where basis is near zero while coverage reflects current replacement value.

You can postpone recognizing that gain by buying qualified replacement property within a set time. The general rule is two years after the close of the first tax year in which any part of the gain is realized.⁵ The replacement property has to be similar in use to what was converted. Spend at least as much on the replacement as you received, and the entire gain is deferred. Spend less, and only the difference is taxable.

For a principal residence or its contents in a federally declared disaster area, the replacement window stretches to four years. Unscheduled personal property insurance proceeds (payments for general household contents rather than specifically listed items) are not treated as a gain at all.⁵ Whatever replacement property you buy has its basis reduced by the deferred gain, so the tax is postponed rather than erased.

Special Rules When the Disaster Is Federally Declared

A federal disaster declaration unlocks two benefits beyond the standard deduction rules.

The biggest is the prior-year election. You can choose to deduct the disaster loss on the return for the year before the disaster happened, rather than waiting until the disaster-year return. This often produces an immediate refund. You make the election by filing Form 1040-X for the prior year, and you have to do it by the due date (including extensions) of the return for the year the disaster occurred.⁶

The second is the extended and relaxed replacement rules under Section 1033. Homeowners get four years instead of two. For business and investment property in a disaster area, any tangible property held for business use qualifies as replacement property, not just property serving the same function as what was destroyed.⁵

Debris removal and demolition costs after a federally declared disaster generally fold into the loss calculation for personal-use property, or become ordinary business expenses for business property. On Form 4684, identify the loss as coming from a federally declared disaster and include the FEMA declaration number to claim any of these special benefits.²

Reporting Losses and Gains on Form 4684

All casualty and theft losses and gains run through IRS Form 4684, Casualties and Thefts, which has three sections for different property types.⁷

Section A handles personal-use property. The $100 per-event and 10% AGI floors are applied here, and the final loss transfers to Schedule A as an itemized deduction.
Section B handles business and income-producing property. Losses transfer to the schedule matching the property type. No per-event or AGI floors apply.
Section C handles theft losses from Ponzi-type investment schemes reported under the Revenue Procedure 2009-20 safe harbor.

Insurance-driven gains that exceed a property’s adjusted basis go on Form 4684 in Section B even when the property was personal-use. If you plan to defer the gain by buying replacement property, report the gain on Form 4684 and follow the deferral instructions.⁶

Ponzi Schemes and Investment Theft Losses

Losses from fraudulent investment schemes get special treatment. Revenue Procedure 2009-20 provides a safe harbor that simplifies both the timing and the amount of the deduction.⁸

Under the safe harbor, your deductible loss equals a percentage of your “qualified investment” (what you put in, plus scheme income you already reported on prior returns, minus what you withdrew). The percentage depends on whether you are pursuing outside recovery: 95% if you are not pursuing any third-party recovery, or 75% if you are pursuing or intend to pursue recovery from parties like auditors or feeder funds. Either figure is then reduced by actual recoveries and by any potential insurance or SIPC payments.⁹

You report the loss in Section C of Form 4684 if you use the safe harbor, or in Section B if you calculate it under general rules. Investment theft losses are treated as business-type losses, so the $100 and 10% AGI floors do not apply and the disaster-only limitation does not either.

Losses on Deposits at Insolvent Banks

If a bank, credit union, or other financial institution becomes insolvent and you lose deposits, Publication 547 gives you two paths:²

Treat it as a casualty loss and deduct the estimated amount in the year you can reasonably estimate what you lost. Because a deposit loss is not tied to a declared disaster, personal-use deposit losses under this path can only offset personal casualty gains.
Treat it as a nonbusiness bad debt and wait until the actual loss is finally determined, then deduct it as a short-term capital loss. This route sidesteps the casualty-gain limitation but takes patience.

Once you pick a method for a given institution, you generally cannot switch without IRS permission. If the actual loss later exceeds what you claimed as a casualty estimate, the excess can be taken as a nonbusiness bad debt in the year the full loss becomes clear.

Documentation You Will Need

Most casualty claims fall apart on records. The IRS expects proof of both the event and the numbers, and the burden sits entirely on you.

For real property, the agency recommends photos and videos taken as soon as possible after the event, closing documents from your title company or lender to establish basis, contractor invoices confirming improvements, appraisals (a professional before-and-after appraisal is the strongest evidence for a large loss), and insurance policies showing the building’s insured value.¹⁰

For personal belongings, credit card and bank statements documenting purchase prices help. For theft, a police report is essential. For business property, supplier invoices, bank statements, and prior tax returns help rebuild inventory and equipment values.

If the disaster destroyed your records, you are not automatically finished. The IRS accepts reconstructed documentation. A property tax statement can separate land value from building value, and home valuation websites or comparable neighborhood sales can substitute for a formal appraisal in some cases.

When the Loss Is Bigger Than Your Income

If your casualty deduction is large enough to push total deductions above your income, the excess may create a net operating loss. You do not need to be in business for this to happen. A personal casualty loss from a declared disaster can generate one on its own.³ A net operating loss can generally be carried forward to offset income in future years, spreading the benefit across multiple returns when a single year cannot absorb the full loss.

1
Internal Revenue Service. Casualty Loss Deduction Expanded and Made Permanent
2
Internal Revenue Service. Publication 547 – Casualties, Disasters, and Thefts
3
Internal Revenue Service. Topic No. 515, Casualty, Disaster, and Theft Losses
4
Office of the Law Revision Counsel. 26 US Code 165 – Losses
5
Office of the Law Revision Counsel. 26 US Code 1033 – Involuntary Conversions
6
Internal Revenue Service. Instructions for Form 4684
7
Internal Revenue Service. Form 4684 – Casualties and Thefts
8
Internal Revenue Service. Help for Victims of Ponzi Investment Schemes
9
Internal Revenue Service. Revenue Procedure 2009-20
10
Internal Revenue Service. Reconstructing Records After a Natural Disaster or Casualty Loss