What Qualifies as a Casualty Loss Deduction: Rules and Limits

The casualty loss deduction lets you reduce your taxable income when property is damaged, destroyed, or lost because of a sudden, unexpected, or unusual event such as a fire, hurricane, tornado, earthquake, or flood. For personal property like your home or car, the loss is deductible only if it comes from a federally declared disaster, and starting in 2026, certain state-declared disasters will also qualify.¹ Business and income-producing property face no disaster-declaration requirement.

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. The event doesn’t have to meet all three; one is enough.²

Sudden means swift rather than gradual. A wildfire that consumes a house in hours qualifies; wood rot that weakens a deck over years does not.
Unexpected means unanticipated. A storm that rips off a roof qualifies; damage you knowingly allowed does not.
Unusual means out of the ordinary for the circumstances. A tornado hitting a neighborhood is unusual; normal rainfall eroding an exposed slope may not be.

Hurricanes, tornadoes, floods, earthquakes, fires, volcanic eruptions, and car accidents caused by someone else’s faulty driving are common qualifying events. The tie that binds them is a distinct, identifiable event, not a slow ongoing process.

What Doesn’t Qualify

Progressive deterioration is never a casualty loss, no matter how bad the eventual damage is.² That rules out:

Termite or moth damage, which develops over months or years.
Rust, corrosion, and erosion from time and exposure.
Normal wear and tear on a roof, appliance, or mechanical system.

The IRS also disallows deductions for accidentally breaking household items like glassware under normal conditions, and for damage caused by a family pet, such as a puppy chewing furniture. Those events are generally foreseeable rather than extraordinary. If a pet caused damage that genuinely met the sudden, unexpected, or unusual standard, a deduction could still apply.

The Disaster Declaration Rule for Personal Property

If the property is something you use personally, the loss is deductible only when it results from a declared disaster. Through the 2025 tax year, that means a federally declared disaster, which requires the President to authorize federal assistance under the Stafford Act.³ Without that declaration, personal-property damage does not qualify for a federal deduction no matter how severe.

Starting with the 2026 tax year, the One Big Beautiful Bill Act expands eligibility to certain state-declared disasters. For a state disaster to count, the state’s governor (or the mayor of Washington, D.C.) and the U.S. Treasury Secretary must agree that the damage is severe enough to warrant the deduction.

Business and income-producing property, including rental real estate, equipment used in your trade, and property held to generate royalties, is not subject to any disaster-declaration requirement. Those losses are deductible whether or not a disaster was declared.

Calculating the Deductible Amount

For each piece of damaged property, you work through four steps:²

Find the property’s adjusted basis, generally your original cost plus improvements.
Calculate the decrease in fair market value from immediately before the casualty to immediately after.
Take the smaller of the two figures.
Subtract insurance payments or other reimbursements you received or expect to receive.

The remainder is your loss on that property. For business property that is completely destroyed, the loss is simply your adjusted basis minus salvage value and insurance proceeds.¹

The $100 Floor and 10 Percent AGI Threshold

Personal-use losses get cut down twice more before they become deductible. You first subtract $100 from each separate casualty event during the year.¹ Then you add up all remaining losses for the year and subtract 10 percent of your adjusted gross income (AGI). Only what’s left is deductible.⁴

Say a hurricane causes $30,000 in uninsured damage to your home and your AGI is $80,000. Subtracting the $100 floor leaves $29,900. Subtracting 10 percent of AGI ($8,000) leaves a $21,900 deduction.

Qualified Disaster Losses Follow a Different Track

A qualified disaster loss uses a $500 per-event reduction instead of $100 and skips the 10 percent AGI threshold entirely.¹ With the same $30,000 loss, you’d deduct $29,500. The qualified disaster track also lets you claim the deduction without itemizing.

Shortcuts for Valuing the Loss

Normally you’d need appraisals before and after the casualty to prove the drop in fair market value. IRS Revenue Procedure 2018-08 offers safe harbor methods the agency won’t challenge.⁵

For residential real property, you can make a good-faith estimate of repair cost for losses of $5,000 or less; use the lower of two independent contractor estimates for losses up to $20,000; or use the loss figure from your insurance company’s report with no dollar cap. For declared disasters, you can also rely on a binding repair contract with an independent contractor or an appraisal prepared for a federal disaster loan application.

For personal belongings like furniture, electronics, and clothing, a good-faith estimate works for losses of $5,000 or less. In a declared disaster, the replacement cost method lets you take the current cost to replace an item new and reduce it by 10 percent for each year you owned it, down to a floor of 10 percent of replacement cost after nine years. All the dollar thresholds are measured before the per-event floor and AGI reduction.

When Insurance Pays More Than Your Basis

If insurance pays out more than your adjusted basis, you have a casualty gain, not a loss, and that gain is generally taxable as a capital gain.¹ You can postpone the gain by buying replacement property that is similar in use, under Section 1033. The general deadline is two years after the close of the first tax year in which you realize the gain; if a federally declared disaster destroys your principal residence, you get four years.⁶

One useful side effect of having a gain: if your personal casualty losses for the year don’t exceed your personal casualty gains, you can deduct those losses up to the amount of the gains, even without a disaster declaration.

How to Claim the Deduction

Casualty losses and gains go on Form 4684. Section A handles personal-use property; Section B handles business and income-producing property. You need a separate Form 4684 (through line 12) for each event involving personal property.⁷

If you itemize, the personal loss flows from Form 4684 to Schedule A. If you have a qualified disaster loss and don’t itemize, you can add that loss to your standard deduction: enter both on Schedule A, combine them, and carry the total to Form 1040.⁸ A qualified disaster loss is therefore available to you even if your other deductions fall short of the standard deduction.

Claiming the Loss on the Prior Year’s Return

For a federally declared disaster, you can elect to deduct the loss on the return for the tax year immediately before the disaster year. That often gets money back faster, since the prior-year return may already be filed and can be amended. To make the election, complete Part I of Section D on Form 4684 and attach it to the prior year’s original or amended return.⁹

The deadline is six months after the regular (unextended) due date of the return for the disaster year. For a calendar-year individual claiming a 2025 disaster loss on the 2024 return, that deadline is October 15, 2026. If you need to amend, file Form 1040-X with Form 4684 attached.

1
Internal Revenue Service. Topic No. 515, Casualty, Disaster, and Theft Losses
2
Internal Revenue Service. Publication 547 (2025), Casualties, Disasters, and Thefts
3
Internal Revenue Service. Instructions for Form 4684 (2025) – General Instructions
4
Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses
5
Internal Revenue Service. Revenue Procedure 2018-08
6
Office of the Law Revision Counsel. 26 U.S. Code 1033 – Involuntary Conversions
7
Internal Revenue Service. Form 4684, Casualties and Thefts
8
Internal Revenue Service. Instructions for Form 4684 (2025) – Increased Standard Deduction Reporting
9
Internal Revenue Service. Instructions for Form 4684 (2025) – Election To Deduct Federally Declared Disaster Loss in Preceding Tax Year