Casualty losses can result from the destruction of, or damage to your property from any
sudden, unexpected, or unusual event such as flood, hurricane, tornado, fire, earthquake
or even volcanic eruption.
If your property is not completely destroyed, to determine your loss from a casualty,
you must first figure 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 value with your adjusted basis in the
property. Adjusted basis is usually its cost plus or minus certain adjustments. The
smaller of the two amounts is your loss from the casualty. For more information about the
basis of property, refer to Topic 704.
Once the actual loss is determined, you must reduce it by the amount of any insurance
or other reimbursement you receive. Up to this point, figuring the deductible loss is the
same for both business and nonbusiness property losses. If the property was held by you
for personal use, you further reduce your loss by $100. This $100 reduction of a non
business loss applies to each casualty or theft loss that occurred during the year. The
total of all your nonbusiness casualty and theft losses must then be reduced by 10% of
your Adjusted Gross Income.
In figuring your loss, the loss of future profits is not considered. The loss of income
you will not realize because of the casualty is also not considered.
For information regarding nonbusiness casualty losses and how to deduct them, refer to Topic 507. Publication 547,
Casualties, Disasters and Thefts (Business and Nonbusiness), Topic
515 contains further information on this subject.
Casualty losses are generally deductible only in the year the casualty occurred.
However, if you have a deductible loss from a disaster in an area that is officially
designated by the President of the United States as eligible for federal disaster
assistance, you can choose to deduct that loss on your return for the year immediately
preceding the loss year. In other words, you may treat the loss as having occurred in
either the current year or the previous year, whichever provides the best tax results for
you. If you have already filed your return for the preceding year, the loss may be claimed
by filing an amended return, Form 1040X.
Generally, you must make the choice to use the preceding year by the due date of the
current year's return, without extensions. For example, the election to deduct a 1997
disaster loss on your 1996 return must be made on or before the due date of the 1997
return. This is April 15, 1998, for calendar year individuals and March 16, 1998, for
calendar year corporations. 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 your main home, or any of its contents, is damaged or destroyed as a result of a
disaster in a Presidentially declared disaster area, you 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. These proceeds can be used to purchase replacement property similar or
related in service or use to your home, or its contents. You can elect to recognize gain
only to the extent that these funds are more than the cost of the replacement property.
The period for purchasing replacement property is extended to 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
If your home is located in a federal 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. Figure your loss in the same way as
any other non business casualty loss. 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
Casualty losses are claimed on Form 4684, Casualties
and Thefts. Section A of Form 4684 is used for nonbusiness property and Section B is
used for business property. You may wish to use Publication 584, Nonbusiness Disaster,
Casualty, and Theft Loss Workbook, to help you catalog your property. To order forms
and publications, call the IRS at 1-800-829-3676, or download them from this web site.
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