What Is a Casualty Loss? Deduction Rules, Limits, and Filing

A casualty loss tax deduction lets you write off property damage caused by a sudden, unexpected, or unusual event, but the rules narrowed sharply after 2017: for personal-use property, the damage must trace to a federally declared disaster, and two separate reductions eat into the loss before it reaches your return. Business and rental property follow easier rules. Whether your loss produces any actual tax benefit depends on the type of property, the type of event, your income, and your records.

What Counts as a Casualty

The IRS defines a casualty as damage, destruction, or loss of property from an identifiable event that is sudden, unexpected, or unusual.¹ Each word does specific work. Sudden means swift, not gradual. Unexpected means unanticipated and unintended. Unusual means outside the routine of daily life.

Fires, floods, hurricanes, earthquakes, tornadoes, and vandalism all fit. So does a car accident, even one caused by your own faulty driving, provided it wasn’t willful negligence.² An ordinary driving mistake is deductible; deliberately crashing your car is not.

What Doesn’t Count

Damage that built up over time fails the suddenness test. The IRS specifically excludes:¹

Termite or moth damage
Trees or plants destroyed by fungus, disease, or insect infestation
Ordinary weather wear across multiple seasons
A foundation slowly sinking or a metal structure gradually rusting

Drought is a common trap. Most drought damage is treated as progressive deterioration and isn’t deductible on a personal return. Drought losses generally deduct only when tied to a trade, business, or profit-seeking transaction.¹

Personal Losses Must Trace to a Federally Declared Disaster

For tax years after 2017, personal casualty losses are deductible only if the damage is attributable to a federally declared disaster.³ The restriction came in with the Tax Cuts and Jobs Act of 2017 and continues under later legislation including the One Big Beautiful Bill Act (P.L. 119-21). A devastating house fire produces no personal deduction unless the President has declared a federal disaster covering your area under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.⁴

FEMA publishes current disaster declarations. Each declaration specifies the qualifying geographic areas, and only property inside those boundaries is eligible.

One narrow exception: if you have personal casualty gains the same year, such as insurance proceeds exceeding the basis of destroyed property, you can offset those gains with personal casualty losses from non-disaster events. Personal theft losses fall under the same disaster-only rule starting in 2018, unless the theft is connected to a trade, business, or profit-seeking transaction.³

If your loss falls in a federally declared disaster area, you can elect to deduct it on the return for the year immediately before the disaster.⁵ That can generate a refund on an amended prior-year return rather than making you wait to file for the disaster year. The election deadline is generally the due date of the disaster-year return, without extensions.

How to Figure the Loss

For personal-use property that’s damaged but not fully destroyed, the deductible loss equals the smaller of two numbers:³

Your adjusted basis in the property (generally cost plus permanent improvements, minus any depreciation or prior casualty deductions), or
The decrease in the property’s fair market value from immediately before to immediately after the event.

From that figure, you subtract insurance or any other reimbursement you received or expect to receive.¹ The remainder is your net loss before the deduction limits apply.

To document the drop in fair market value, the IRS looks for an appraisal by a competent appraiser comparing the before and after condition.¹ Repair costs from a licensed contractor can substitute for the decline in value if certain conditions are met.³ Photos taken before and after, purchase receipts, and improvement records all matter. Weak documentation is where most claims fall apart.

Simplified Valuation for Household Belongings

Appraising every damaged item in a house isn’t realistic. Revenue Procedure 2018-08 offers two shortcuts for personal belongings:⁶

A de minimis safe harbor for any casualty or theft loss of $5,000 or less (before applying the deduction limits) lets you make a good-faith estimate of the decrease in fair market value, as long as you keep records describing the belongings and your method.
A replacement cost safe harbor, available only for losses from a federally declared disaster, lets you take the current cost to replace each item new and reduce it by 10% for each year you owned it. A five-year-old item is valued at 50% of replacement cost; anything nine years or older is valued at 10%. You must apply this method to all personal belongings claimed for that disaster, and it excludes vehicles, boats, aircraft, antiques, and other items that tend to hold or gain value.

Insurance Cuts the Deduction First

Insurance proceeds come off the top before any other limit. Full coverage means no deduction. And if you have coverage, you must file a timely claim. Skip the claim and you can only deduct the uninsured portion.¹ Choosing a deduction over an available insurance payout isn’t allowed.

Insurance can also pay more than your basis, creating a taxable casualty gain.³ Section 1033 lets you defer that gain by buying replacement property in time. The general replacement period is two years after the close of the tax year the gain is realized; for a principal residence destroyed in a federally declared disaster, it stretches to four years.⁷

The $100 and 10% AGI Reductions

Once you have a net loss on personal-use property, two reductions apply. First, subtract $100 from each separate casualty or theft event.¹ A single storm that damages both your home and car is one event with one $100 reduction. A storm in March plus a fire in October is two events with two reductions.

Second, add up all your casualty losses for the year (after the $100 reductions) and subtract 10% of your adjusted gross income.¹ Only the amount above that 10% floor is deductible.

For a taxpayer with $80,000 of AGI and a single $25,100 net loss:

Net loss after insurance: $25,100
Minus the $100 per-event floor: $25,000
Minus 10% of AGI ($8,000): $17,000 deductible

The higher your income, the less small losses do for you. Someone earning $150,000 sees no benefit unless total losses (after the $100 reductions) top $15,000.

Better Treatment for Qualified Disaster Losses

Losses from certain major federally declared disasters get more favorable treatment under rules extended by the One Big Beautiful Bill Act. For a qualified disaster loss, the per-event reduction is $500 instead of $100, the 10% AGI floor doesn’t apply, and you can claim the deduction without itemizing.³ For anyone who otherwise takes the standard deduction, that last point is the big one. A qualified disaster loss covers major disasters declared by the President from January 1, 2020, through September 2, 2025, with an incident period ending no later than August 3, 2025.¹

Business and Rental Property Follow Easier Rules

If the damaged property is used in a trade or business or held for income, neither the $100 floor nor the 10% AGI threshold applies.¹ The calculation also changes when the property is completely destroyed: you take adjusted basis, subtract salvage value and insurance proceeds, and the remainder is your deduction. The fair-market-value comparison that governs personal property drops out.³

Mixed-use property gets split. You allocate the loss between personal and business use, apply the personal rules to one share and the business rules to the other.¹ A home office is the typical example: the business share escapes the $100 and 10% AGI hurdles; the personal share doesn’t.

Filing the Deduction

Casualty and theft losses go on Form 4684, attached to your return. Section A is for personal-use property; Section B is for business and income-producing property. For most personal losses, you also have to itemize on Schedule A, so the deduction only helps if your itemized total beats the standard deduction. Qualified disaster losses are the exception and can be claimed alongside the standard deduction.⁸

Keep organized records either way. The IRS expects a detailed inventory of damaged or destroyed property with descriptions, original costs, purchase dates, improvement receipts, insurance policies, and before-and-after photographs. Proving both the event and the amount is entirely on you.

1
Internal Revenue Service. Publication 547 (2025), Casualties, Disasters, and Thefts
2
eCFR. 26 CFR 1.165-7 – Casualty Losses
3
Internal Revenue Service. Topic No. 515, Casualty, Disaster, and Theft Losses
4
Office of the Law Revision Counsel. 42 U.S.C. Chapter 68 – Disaster Relief
5
Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses
6
Internal Revenue Service. Safe Harbor Methods for Determining Casualty and Theft Losses for Personal Belongings
7
Office of the Law Revision Counsel. 26 U.S. Code 1033 – Involuntary Conversions
8
Internal Revenue Service. Instructions for Form 4684 (2025)