Gone with the wind: Deducting Casualty Losses

Tax News You Can Use | For Professional Advisors

Jane Ditelberg, Director of Tax Planning
Mike Byrne, Senior Wealth Advisor

April 27, 2025

What if the roof is gone with the wind? In the last year, many individual taxpayers have experienced loss or destruction of property due to natural disasters, including hurricanes, tornadoes, fires, floods and mudslides. Some of these losses will be covered by insurance proceeds, but others will not. The IRS provides relief in the form of tax deductions or deferrals for those facing personal casualty losses. However, the availability of these tax benefits is limited by when the loss occurred, whether it was a federally declared disaster, what type of property was impacted, and when any reinvestment is made.

The IRS has also granted automatic extensions of time to file returns and pay tax to certain victims of natural disasters. For more details, see IRS Grants Extensions of Time For Taxpayers in Declared Disaster Areas | Northern Trust.

What are Casualty Losses and Casualty Gains?

A casualty is the damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual. A casualty loss can result from a number of different causes including everything from the more common vandalism, storms and fires to the less common earthquakes, volcanic eruptions and shipwrecks. Not all property loss or destruction is a casualty loss — damages caused by your pet, from a car accident or house fire that was your fault or from progressive deterioration of property do not qualify as casualty losses.

Casualty gains occur when reimbursement (for example, from insurance) and relief payments exceed the taxpayer’s adjusted basis in the property lost, damaged or destroyed in the casualty event. This gain can be deferred by investing in replacement property within the replacement window, which is generally two years from the closing of the calendar year in which the gain is incurred or four years for a principal residence located in a federal disaster area.

Which Personal Casualty Losses are Deductible for Income Tax Purposes?

For income tax purposes, personal casualty losses (this excludes loss of business property) fall into three categories:

• Casualty losses that are not attributable to a federally declared disaster and that are only deductible against casualty gains (non-disaster casualty losses). These include losses from storms or other events that are not federally declared disasters as well as casualty losses that only impact the taxpayer, such as a house fire from a lightning strike.
• Casualty losses from federally declared disasters that are deductible only if you itemize your deductions (disaster area casualty losses or DCLs). This category includes losses from all federally declared disasters other than those covered by special legislation applicable only to federally declared disasters between January 1, 2024 and December 12, 2024.
• Casualty losses from certain specific federally declared disasters occurring in 2024 that are deductible even if you do not itemize your deductions (qualified disaster area casualty losses or QDCLs).

What Limitations did the TCJA Place on Casualty Loss Deductions?

Prior to 2018, there were only two categories of casualty losses — non-deductible casualty losses and deductible casualty losses that could be deducted regardless of gain as long as certain thresholds were met. The Tax Cuts and Jobs Act (TCJA) introduced the requirement that to be deductible other than against casualty gains, the loss had to occur as the result of a federally declared disaster. This means that a casualty loss that only impacts one taxpayer (such as a house fire) has limited deductibility. The casualty loss deduction is also only available for losses that exceed $100 and 10% of the taxpayer’s adjusted gross income (AGI). Furthermore, the deduction is only available to taxpayers who itemize their deductions. These rules, like most of the TCJA, only apply to tax years 2018 through 2025. However, Congress and the president have declared their intention to extend the application of the TCJA, so these rules may continue to apply.

What is the Federal Disaster Tax Relief Act of 2023?

From time to time, Congress has adopted more favorable rules for deducting losses in the wake of certain natural disasters. The Federal Disaster Tax Relief Act (FDTRA) of 2023 (enacted on December 12, 2024) provides tax relief to individuals who experienced certain types of casualty losses that occurred within a specified period of time. FDTRA removes limitations on casualty loss deductibility for losses incurred from federally declared disasters that occurred between January 1, 2024 and December 12, 2024 and were declared disasters by January 11, 2025. Notably, this includes both Hurricane Helene and Hurricane Milton, but does not include losses from the California wildfires,² which was declared a federal disaster that began on January 7, 2025, but did not start before December 12, 2024.

FDTRA made three adjustments to the rules governing casualty loss deductions. First, for losses covered by FDTRA, the deduction is available even if the taxpayer does not itemize deductions (i.e., it can be taken on top of the standard deduction). Second, there is no requirement that the loss exceed the 10% of AGI floor. Finally, while under the general rules for DCLs under the TCJA, casualty losses can be deducted if they exceed $100 per loss, the QDCL rules only apply if the loss exceeds $500.

How is the Amount of a Casualty Loss Determined?

Whether a casualty loss deduction is a DCL or a QDL, the amount of the deduction is limited to the lesser of: 1) the decline in the property’s fair market value due to the casualty or 2) the property’s adjusted cost basis prior to the casualty event (minus any insurance or other reimbursements received or expected to be received). Losses may be documented using qualified appraisals or costs of repair. As noted, the deductible amount for a DCL is limited to the amount by which the loss exceeds $100 and 10% of the taxpayer’s AGI for the year of the loss. For a QDCL, the deductible amount is limited to the amount by which the loss exceeds $500.

When is a Casualty Loss Deduction Claimed?

Typically, casualty loss deductions are claimed in the tax year in which the event causing the loss occurred. There are some situations in which the loss is deductible in a subsequent tax year — typically when it is unclear whether the loss will be reimbursed and for how much. And in a few limited circumstances, a taxpayer can elect to deduct the amount on the return for the tax year immediately preceding the event causing the loss. For details on when the deduction can be deferred or accelerated, consult IRS 2024 Publication 547.

What Tax Forms Are Used to Report Casualty Gains and Losses?

Casualty gains and losses are detailed on IRS 2024 Form 4684. In addition, the loss is claimed on Schedule A and any gain is reported on Schedule D of the taxpayer’s 1040.