7.6 Casualty & Theft Losses
Key Takeaways
- OBBBA made permanent the rule that personal casualty/theft losses are deductible ONLY if attributable to a federally declared disaster — no longer a scheduled sunset after 2025
- Personal losses are subject to a $100-per-casualty floor AND a 10%-of-AGI floor after netting insurance reimbursement
- Loss formula: lesser of decline in FMV or adjusted basis, minus insurance reimbursement
- Business casualty losses remain fully deductible without the $100 or 10%-AGI limitations
- Casualty gains can be deferred by purchasing qualified replacement property within the replacement period (2 years generally; 4 years for principal residence in a federally declared disaster area)
Personal Casualty Losses Restricted to Federally Declared Disasters — Now Permanent
The 2017 Tax Cuts and Jobs Act (TCJA) limited personal casualty and theft loss deductions to federally declared disasters for 2018-2025. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made this restriction PERMANENT — there is no scheduled sunset.
Key Point: A federally declared disaster is one the President determines warrants federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act—major disaster declarations and emergency declarations both qualify.
What This Means for 2025:
- 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, flood, or tornado in a federally declared disaster area, the loss may be deductible
- The disaster must be officially declared by the President — state declarations alone do not qualify
Calculating the Casualty Loss
The amount of your casualty or theft loss is computed using this formula:
| Step | Description |
|---|---|
| 1 | Determine the adjusted basis of the property before the casualty |
| 2 | Determine the decline in Fair Market Value (FMV) (FMV before minus FMV after) |
| 3 | Take the LESSER of adjusted basis or decline in FMV |
| 4 | Subtract any insurance or other reimbursement received or expected |
| 5 | The result is your loss amount before applying the floors |
Personal Property Loss Limitations
For personal-use property, two additional limitations apply (unchanged for 2025):
- $100 Per Casualty Floor: Subtract $100 from each separate casualty or theft event
- 10% of AGI Floor: After the $100 reductions, subtract 10% of AGI from total losses
Calculation Example (2025)
Facts: Sarah's home was damaged in a 2025 federally declared hurricane. Her home's adjusted basis was $300,000. FMV before the hurricane was $400,000; after, $350,000. Insurance paid $30,000. Her 2025 AGI is $80,000.
| Step | Calculation | Amount |
|---|---|---|
| Decline in FMV | $400,000 – $350,000 | $50,000 |
| Lesser of basis or FMV decline | Lesser of $300,000 or $50,000 | $50,000 |
| Less: Insurance reimbursement | $50,000 – $30,000 | $20,000 |
| Less: $100 per casualty floor | $20,000 – $100 | $19,900 |
| Less: 10% of AGI ($80,000 × 10%) | $19,900 – $8,000 | $11,900 |
Sarah's deductible casualty loss = $11,900
Timing Rules: When to Claim the Deduction
| Type of Loss | When to Deduct |
|---|---|
| Casualty loss | Tax year in which the casualty occurred |
| Theft loss | Tax year in which the theft was discovered |
| Federally declared disaster | Option to deduct in the year of the disaster OR the preceding tax year (amended return) |
EA Exam Tip: Casualty losses are deducted when they OCCUR, but theft losses are deducted when DISCOVERED. This is a classic exam distinction.
Deferring Casualty Gains
When insurance reimbursement exceeds adjusted basis in destroyed or damaged property, you have a casualty gain. The gain can be deferred (Section 1033) by purchasing qualified replacement property.
Replacement Period Rules
| Property Type | Replacement Period |
|---|---|
| General rule | 2 years from the close of the tax year in which the gain is realized |
| Principal residence in federally declared disaster area | 4 years from the close of the tax year in which the gain is realized |
| Property in a federally declared disaster area (business or income-producing) | 5 years from close of year of gain (special extended rule for certain federally declared disasters) |
Partial Reinvestment: If replacement property costs less than insurance proceeds, gain is recognized to the extent proceeds exceed replacement cost.
Business Casualty Losses
Business property casualties remain more favorably treated:
- No $100 per casualty floor
- No 10% of AGI threshold
- Losses are fully deductible against business income
- Reported on Form 4684, Section B; flows to Form 4797
Important: Casualty and theft losses on property used in performing services as an employee cannot be deducted on Schedule A — TCJA suspended miscellaneous 2% itemized deductions and OBBBA made the suspension PERMANENT (except limited above-the-line carve-outs like the $300 educator expense).
Form 4684 Reporting
| Section | Property Type |
|---|---|
| Section A | Personal-use property |
| Section B | Business or income-producing property |
Filing Requirement: If your property is covered by insurance, you must file a timely insurance claim to deduct any unreimbursed portion. Failing to file a claim means you cannot deduct the portion that would have been covered.
Special Rules and Exceptions
Qualified Disaster Loss (QDL) Benefits
For certain qualified disaster losses (i.e., losses from specific federally declared disasters Congress designates):
- The $100 floor is increased to $500
- The 10% AGI floor does NOT apply
- The deduction can be claimed even if the taxpayer takes the standard deduction (added to it)
This special rule has been extended in past disaster-relief bills and continues to apply to specifically designated disasters as Congress enacts them.
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.
EA Exam Tips
- Federally declared disaster requirement is permanent under OBBBA — never speculate that the rule will revert
- Order of Floors: Apply the $100 floor FIRST, then the 10% AGI floor
- Lesser of Test: Always use the lesser of adjusted basis or decline in FMV
- Business vs. Personal: Business losses have no floors — fully deductible
- Theft Timing: Theft losses are deducted when DISCOVERED, not when the theft occurred
- Insurance Requirement: Must file a timely insurance claim to deduct any portion of the loss
- Replacement period: 2 years general; 4 years for principal residence in federal disaster area
For 2025 (post-OBBBA), personal casualty losses are deductible only if:
Maria had personal property worth $25,000 (adjusted basis $20,000) completely destroyed in a 2025 federally declared flood. She received $10,000 from insurance. Her 2025 AGI is $50,000. What is her deductible casualty loss?
Which statement about business casualty losses on a 2025 return is CORRECT?