Disasters, Casualty and Theft Loss

There has definitely been an increase over the past few years in weather related incidents as climate change affects our every day lives more and more. Many people are experiencing weather related incidents for the first time and many of our clients have had similar questions about how they affect their tax situation.

The IRS has specific rules for casualty losses. First, the loss must be from damage, destruction or loss of property due to an identifiable event that is sudden, unexpected and unusual, such as floods, fires, storms, and other natural disasters. To qualify, taxpayers must own or leasehold the property, have realized loss, and the loss cannot be caused by willful/gross negligence by the taxpayer. Losses from theft include blackmail, burglary, embezzlement, extortion, kidnapping, larceny, and robbery. A casualty is not identified as accidental damage, pet damage, willful act by the taxpayer, damages due to poor construction, and normal wear and tear (including drought, insects, fungus, mold, etc.).

Casualty losses can be taken in the year before or the year of the loss and the taxpayer must file Form 4684. Taxpayers are reminded to include any reimbursements they received for the loss.

The TCJA Act eliminated casualty deductions (Tax years 2018 thru 2025) except for Presidential Declared Disaster Areas. This means that the President of the US must declare a particular area as a disaster in order for the taxpayer to receive their deduction. You must be certain that your zip code is included in the Federally declared disaster area. Just because a big hurricane swept through your general area and you endured some major damage to your property, your particular neighborhood may not be on the federally declared list. Check www.fema.gov to find out if your area is included.

Here are some helpful tips for you to follow when determining your loss:

  1. Must be a presidential federally declared disaster. You need a DM or EM declaration number assigned by FEMA.

  2. The IRS needs to know what the Fair Market Value was before and after the casualty. Insurance and other reimbursements, received or expected, are deducted from the FMV. Determine the type of property lost, when it was acquired, and the cost of the property. You may include costs to repair the damage to the property: costs that are necessary to bring the property back to its condition before the casualty and do not add value to the property.

  3. You may have several types of possessions that were damaged - for example, your home, your landscaping and the contents of your home.

  4. When determining the FMV of your home, you need to know the value of the land because this is a separate item.

  5. See Publication 584, Casualties, Disaster and Theft Loss Workbook on IRS.gov. Also, Publication 547, Casualties, Disasters and Thefts to help you figure your casualty loss deduction.