Casualty & Theft Losses

TCJA Changes: The Federally Declared Disaster Requirement

The Tax Cuts and Jobs Act (TCJA) made a significant change to casualty and theft loss deductions. For tax years 2018 through 2025, personal casualty and theft losses are only deductible if attributable to a federally declared disaster.

Key Point: A federally declared disaster is one that the President determines warrants federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This includes both major disaster declarations and emergency declarations.

What This Means:

• If your car is stolen or damaged in an accident (not a disaster), you cannot deduct the loss
• If your home is damaged by a hurricane, wildfire, or flood in a federally declared disaster area, the loss may be deductible
• The disaster must be officially declared by the President

Calculating the Casualty Loss

The amount of your casualty or theft loss is calculated using this formula:

Personal Property Loss Limitations

For personal-use property, two additional limitations apply:

1. $100 Per Casualty Floor: Subtract $100 from each separate casualty or theft event
2. 10% of AGI Floor: After the $100 reduction, subtract 10% of your AGI from the total losses

Calculation Example

Facts: Sarah's home was damaged in a federally declared hurricane. Her home had an adjusted basis of $300,000. The FMV before the hurricane was $400,000, and after the damage, it was $350,000. Her insurance company paid $30,000. Sarah's AGI is $80,000.

Sarah's deductible casualty loss = $11,900

Timing Rules: When to Claim the Deduction

Exam Tip: Remember the distinction - casualty losses are deducted when they occur, but theft losses are deducted when discovered. This is a common EA exam question!

Deferring Casualty Gains

When insurance reimbursement exceeds your adjusted basis in destroyed or damaged property, you have a casualty gain. This gain can be deferred if you purchase qualified replacement property.

Replacement Period Rules

Partial Reinvestment: If the cost of replacement property is less than the insurance proceeds, gain is recognized only to the extent the proceeds exceed the cost of the replacement property.

Business Casualty Losses

Business property casualties are treated differently and more favorably:

• No $100 per casualty floor
• No 10% of AGI threshold
• Losses are fully deductible against business income
• Reported on Form 4684, Section B and flows to Form 4797

Important: Casualty and theft losses of property used in performing services as an employee cannot be deducted (this is due to TCJA suspending the miscellaneous itemized deductions for employee business expenses).

Form 4684 Reporting

Filing Requirement: If your property is covered by insurance, you must file a timely insurance claim to deduct any unreimbursed portion. Failure to file a claim means you cannot deduct the portion of the loss that would have been covered.

Special Rules and Exceptions

Qualified Disaster Loss (QDL) Benefits

For certain qualified disaster losses:

• The $100 floor is increased to $500
• The 10% AGI floor does NOT apply
• The deduction can be claimed even if you don't itemize (added to standard deduction)

Casualty Gains Offset Exception

If you have a personal casualty gain during the tax year, you may deduct personal casualty losses (even those NOT from a federally declared disaster) to the extent they don't exceed your personal casualty gains.

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EA Exam Tips

1. TCJA Rule is Critical: For 2024 tax year, remember personal casualty losses require a federally declared disaster
2. Order of Floors: Apply the $100 floor FIRST, then the 10% AGI floor
3. Lesser of Test: Always use the lesser of adjusted basis or decline in FMV
4. Business vs. Personal: Business losses have no floors - they're fully deductible
5. Theft Timing: Theft losses are deducted when DISCOVERED, not when the theft occurred
6. Insurance Requirement: Must file timely insurance claim to deduct any loss