Rev. date: 09/2006
A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, and unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.
If your property is not completely destroyed, or if it is personal-use property, the amount of your casualty or theft loss is the lesser of the adjusted basis of your property, or the decrease in fair market value of your property as a result of the casualty or theft. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation. For more information about the basis of property, refer to Tax Topic 703
, or Publication 547
, Casualties, Disasters, and Thefts
. You may determine the decrease in fair market value by appraisal or, if certain conditions are met, by the cost of repairing the property. For more information, refer to Publication 547. Keep in mind the general definition of fair market value is the price at which property would change hands between a buyer and seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.
If the property was held by you for personal-use, you must further reduce your loss by $100. This $100 reduction for losses of personal-use property applies to each casualty or theft event that occurred during the year. The total of all your casualty and theft losses of personal-use property must be further reduced by 10% of your adjusted gross income.
Recent legislation changed some of the tax rules pertaining to losses resulting from federally declared disasters. The new law removes the 10 percent of adjusted gross income limitation for net disaster losses and allows individuals to claim the net disaster losses even if they do not itemize their deductions. The new law is effective for disasters declared in taxable years beginning after December 31, 2007, and occurring before January 1, 2010. The new law also increases to $500 (effective for disasters occurring in 2009) the amount by which all individuals must reduce their casualty and theft losses for personal-use property. This $500 reduction for losses of personal-use property applies to each casualty or theft event and applies to deductions taken in 2009. More information on the new legislation can be found on the IRS Website at the following link: Tax Relief in Disaster Situations
For more information regarding casualty losses of personal-use property and how to deduct them, refer to Tax Topic 507
and Publication 547
, Casualties, Disasters, and Thefts
If your business or income-producing property is completely destroyed, the decrease in fair market value is not considered. Your loss is the adjusted basis of the property, minus any salvage value and any insurance or other reimbursement you receive or expect to receive. For more information on determining adjusted basis, see Publication 551
, Basis of Assets
In figuring your loss, do not consider the loss of future profits or income due to the casualty.
Casualty losses are claimed on Form 4684
, Casualties and Thefts
. Section A is used for personal–use property and Section B is used for business or income-producing property. If personal-use property was destroyed or stolen, you may wish to refer to Publication 584
, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)
. For losses involving business-use property, refer to Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook
Casualty losses are generally deductible only in the year the casualty occurred. However, if you have a deductible loss from a disaster in a Presidentially declared disaster area, you can choose to deduct that loss on your tax return for the year immediately preceding the year of the casualty. If you have already filed your return for the preceding year, the loss may be claimed in the preceding year by filing an amended return, (Form 1040-X
for Individuals or Form 1120-X
Generally, you must make the choice to use the preceding year by the due date of the current year's return, without extensions.
The election to deduct a 2005 disaster loss on your 2004 return must be made on or before the due date (without extensions) of the 2005 return.
You can revoke this choice within 90 days after making it by returning to the IRS any refund or credit you received from making the choice. If you revoke your choice before receiving a refund, you must return the refund within 30 days after receiving it for the revocation to be effective.
Generally, you can choose to postpone reporting gain due to insurance proceeds that exceed your basis in property destroyed or damaged by a casualty if you purchase replacement property or repair the damage within two years. Postponement of gain is only available if the amount you spend on replacing or repairing your property is equal to, or exceeds, the insurance proceeds you receive. Otherwise, the excess of the insurance proceeds over the amount you spend to replace or repair your property must be reported as gain.
If your main home, or any of its contents, is damaged or destroyed as a result of a disaster in a Presidentially declared disaster area, do not report any gain due to insurance proceeds you receive for unscheduled personal property, such as damaged furniture, that was part of the contents of your home. You can choose to postpone gain from any other insurance proceeds received for your main home or its contents if you purchase replacement property within four years after the close of the first tax year in which any gain is realized. For this purpose, insurance proceeds received for the home or its contents are treated as being received for a single item of property, and any replacement property you purchase that is similar or related in service or use to your home or its contents is treated as similar or related in service or use to that single item of property. Again, postponement of gain is only available if the amount you spend on replacing or repairing your property is equal to, or exceeds, the insurance proceeds you receive. Otherwise, you must recognize gain to the extent that the insurance proceeds are more than the cost of your replacement property. Renters qualify to choose relief under these rules if the rented residence is their main home.
If your home is located in a Presidentially declared disaster area and your state or local government orders you to tear it down or move it because it is no longer safe to live in, the resulting loss in value is treated as a casualty loss from a disaster. Figure your loss in the same way as any other casualty loss of personal-use property. The State or local government order must be issued within 120 days after the area is declared a disaster area.
If your loss deduction is more than your income, you may have a net operating loss. You do not have to be in business to have a net operating loss from a casualty. For more information, refer to Publication 536
, Net Operating Losses.
The IRS may postpone for up to one year certain tax deadlines of taxpayers who are affected by a Presidentially declared disaster. The tax deadlines the IRS may postpone include those for filing income, estate, gift, generation-skipping transfer, certain excise, and employment tax returns, paying taxes associated with those returns, and making contributions to a traditional IRA or Roth IRA.
If the IRS postpones the due date for filing your return and for paying your tax and you are affected by a Presidentially declared disaster area, the IRS may abate the interest on underpaid tax that would otherwise accrue for the period of the postponement.