Casualty losses can result from the destruction of, or damage to 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 stolen, or if it is personal-use
property, determine your loss from a casualty by first figuring the decrease
in fair market value of your property as a result of the casualty event. To
do this, you must determine the fair market value of your property both immediately
before and immediately after the casualty. An appraisal is the best way to
make this determination. Compare the decrease in fair market value with your
adjusted basis in the property. The adjusted basis is usually the cost of
the property plus or minus certain adjustments. From the smaller of these
two amounts, subtract any insurance or other reimbursement you receive or
expect to receive. The result is your loss from the casualty. For more information
about the basis of property, refer to Topic 703, or refer to Publication 551, Basis of Assets.
If your business or income-producing property is completely destroyed or
stolen, 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.
If the property was held by you for personal use, you must further reduce
your loss by an amount specified by law. This specified amount 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
In figuring your loss, do not consider the loss of future profits or income
due to the casualty.
For more information regarding casualty losses of personal–use property
and how to deduct them, refer to Topic 507 and Publication 547, Casualties,
Disasters, and Thefts.
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 1040X (PDF) for
Individuals or Form 1120X (PDF) for Corporations).
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.
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. Any
other insurance proceeds received for the home or its contents can be treated
as being received for a single item of property. 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. You can choose to recognize gain only to the extent that
the insurance proceeds are more than the cost of your replacement property.
If you choose to postpone any gain from the insurance proceeds you received,
the period for purchasing replacement property is four years after the close
of the first tax year in which any gain is realized.
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. This 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
Casualty losses are claimed on Form 4684 (PDF), 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, to help you catalog your property.
If the property was business or income-producing property, refer to Publication 584B (PDF), Business Casualty, Disaster,
and Theft Loss Workbook.
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
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.