What are casualty and theft losses?

Casualty and theft losses are deductible losses arising from the destruction or loss of a taxpayer’s personal property due to a sudden or unforeseen event. 

Simply put, when property gets damaged, destroyed, or stolen, you have to pay to fix or replace it. If the damage results from a sudden event beyond your control, you may be able to deduct the cost of the loss from the taxes you owe. 

There are some limitations to the deductibility of such losses, though.  

For example, you may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement, and you reduce the loss by the amount of any reimbursement or expected reimbursement. 

Additionally, a personal casualty or theft loss relating to your home, household items, or vehicles is generally deductible (again, subject to limitations) on your federal income tax return only if such loss results from a federally-declared disaster. This means the President of the United States has determined the disaster warrants assistance from the federal government. 

This restriction is relatively new, created by a provision of the 2017 Tax Cuts and Jobs Act (TCJA). 

It is worth noting that some states, such as New York, decoupled from specific changes enacted by the TCJA for 2018 and after. That means that some taxpayers may still be able to deduct certain losses at the state level in some states. 

For areas that the federal government has determined to be federally-declared disaster areas, go to www.fema.gov/disasters.

Casualty and theft loss examples

Although “casualty” and “theft” are both deductible as losses, the IRS does not define them the same way. A casualty occurs when your property suffers damage from a disaster, whereas a theft occurs when someone steals from your property. 

If the damage or destruction is the result of your own action, whether willful or accidental, you cannot deduct a loss. For example, damage caused by accidental breakage under normal conditions, a fire you set or paid someone else to set, or damage caused by a family pet are all non-deductible losses.

In fact, as mentioned above, IRS Publication 547 establishes that casualty and theft losses “are deductible only to the extent they’re attributable to a federally declared disaster.”

Some examples include: 

  • Floods
  • Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster
  • Mine cave-ins
  • Shipwrecks
  • Sonic booms
  • Storms, including hurricanes and tornadoes
  • Terrorist attacks
  • Vandalism
  • Volcanic eruptions

Although the above list includes human activities, like terrorist attacks and vandalism, it is important to clarify that, in accordance with the TCJA, such events are only covered if they occur during a federally-declared emergency. 

Furthermore, it is also worth noting that only the property owner is eligible to take this deduction. For example, if a flood damages your rental unit, only your landlord, not you, can claim the deduction. (You may be eligible for a rent payment deduction.)

Some examples of a theft loss, or loss due to the illegal taking and removal of money or property with criminal intent, include: 

  • Blackmail
  • Burglary
  • Embezzlement
  • Extortion
  • Kidnapping for ransom
  • Larceny
  • Robbery
  • Fraud or misrepresentation

You can claim theft losses using Form 4684.

How to calculate a casualty or theft loss

To claim your casualty and theft losses as an itemized deduction, you’ll need to report them as miscellaneous itemized deductions on Form 4684 (carried over to the Schedule A and 1040 forms). Again, remember that you can only do this if a federally-declared disaster caused your casualty claim.

If you cannot itemize your deductions, and if your casualty losses were not the result of a federally-declared disaster, you will not be able to claim them. 

You can determine the deduction for a casualty or theft loss by first calculating the loss with the following steps: 

  1. Determine the adjusted basis in the property before the loss. 
  2. Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. 
  3. From the smaller amounts determined in (1) and (2), subtract any insurance or other reimbursement received or expected to be received. 

When it comes to business and income-producing property. the decrease in FMV is not considered in calculating the loss for property that is stolen or completely destroyed

Some loss limitations may apply. For example, you will need to reduce each casualty or theft loss event by $100. If multiple pieces of property are damaged in a single event, a single $100 reduction applies. 

Finally, a 10% AGI limit may apply. This will require you to reduce the total of all casualty or theft losses by 10% of your AGI or adjusted gross income. 

When to deduct losses

Casualty losses are deductible in the year you sustain the loss, which is generally the year the casualty occurred, or you discovered the theft. However, you may instead be able to deduct losses in the tax year you reasonably determine the reimbursement amount (if any) or the year in which you will receive no additional reimbursement, if that year occurs later than the year you sustained the loss. 

Alternatively, you may elect to deduct a casualty loss from a federally-declared disaster in the tax year immediately preceding the disaster year. If you choose to do so, you must make the election within six months after the regular due date (without extensions) for filing the original return for the disaster year. 

Finally, if your loss deduction exceeds your income, you may have a Net Operating Loss (NOL). You don’t have to be in business to have an NOL from a casualty. However, if you are facing a business Net Operating Loss, you may wish to consult our recent blog post, which dug deeper into this subject. 

The bottom line

Nobody wants to deal with a casualty or theft loss, but unfortunately, it can happen to anyone. Should you face disastrous circumstances, we hope this post will help expedite your recovery.

Would you like some help?

If you are a client and would like to book a consultation, call us at +1 (212) 382-3939 or contact us here to set up a time.

If you aren’t a client, why not? We can take care of your accounting, bookkeeping, tax, and CFO needs so that you don’t have to worry about any of them. Interested? Contact us here to set up a no-obligation consultation.

Stay informed

Interested in receiving updates in your mailbox? Check out our newsletter, full of information you can use. It comes out once every two weeks, and you can register for it below.