Casualty Deduction Under IRC Section 165: Rules and Reporting

The casualty loss deduction under IRC Section 165 lets you write off property damaged or destroyed by a sudden, unexpected event such as a fire, flood, hurricane, or earthquake, but the rules split hard along one line: whether the property was personal or used in a business.¹ Personal-use losses are now permanently limited to federally declared disasters (and, starting in 2026, state-declared disasters), and they must survive a $100-per-event floor and a 10% AGI threshold before anything reaches your return. Business property losses face none of those cutbacks.

What Counts as a Casualty

The event has to be sudden, unexpected, or unusual. Fires, storms, floods, earthquakes, volcanic eruptions, and vandalism all qualify.² “Sudden” is the operative word: the event needs an identifiable beginning and end, with damage you can point to and measure.

Gradual deterioration is out. Termite damage, rust, mold that builds over months, drought-related soil erosion — none of those qualify. If you can’t tie the damage to a specific event on a specific date, the deduction almost certainly won’t survive an audit.

Personal Property vs. Business Property

The rules diverge sharply based on how you used the property.

For personal-use property (your home, car, or belongings), the Tax Cuts and Jobs Act limited deductions to federally declared disaster losses for 2018 through 2025. P.L. 119-21, the One Big Beautiful Bill Act enacted July 4, 2025, made that restriction permanent and extended it to also cover state-declared disasters beginning in 2026.³

A federally declared disaster is one the President has determined warrants federal assistance under the Stafford Act. A state-declared disaster, new for 2026, requires a determination by both the governor of the state (or the mayor of D.C.) and the Secretary of the Treasury that the damage is severe enough to warrant application of the casualty loss rules.¹ If a personal-use loss doesn’t fall within a qualifying disaster — a tree falls on your car in an ordinary thunderstorm, say — you get nothing. That is now the permanent rule.

Business and income-producing property operates under a different regime. A casualty to property used in a trade or business is deductible as an ordinary loss whether or not any disaster has been declared.⁴ The loss offsets ordinary income directly and skips both the per-event dollar floor and the 10% AGI threshold that apply to personal losses. Adjusted basis for business property is your original cost reduced by any depreciation you’ve claimed; that depreciated basis is the ceiling for the loss. Personal property isn’t depreciated, so its basis is generally the purchase price plus improvements.

Theft losses on personal property follow the same disaster-only rule, which effectively eliminates the deduction for ordinary burglaries and break-ins. Business theft losses remain fully deductible.²

You Have to File the Insurance Claim

If your damaged personal-use property is covered by insurance, you have to file a timely claim or you cannot deduct the insured portion of the loss.¹ Only the uninsured portion — like your deductible — is exempt from this requirement.⁴ Skipping the claim to avoid a premium increase means forfeiting the tax deduction on whatever the policy would have paid. Do the math before you make that call.

How to Calculate the Loss

The core rule for partially damaged property: compare the property’s adjusted basis before the casualty against the decrease in fair market value the casualty caused. Your loss is the smaller of those two numbers.² This prevents anyone from deducting more than they had invested in the property to begin with.

You can establish the drop in fair market value with a qualified appraisal or, in many situations, with the actual cost of repairs. Repair costs work as evidence only if they address damage from the casualty itself, don’t extend beyond restoring the property to its pre-casualty condition, and aren’t excessive.⁴

When business or income-producing property is completely destroyed, the loss is simply the adjusted basis minus salvage value and any insurance reimbursement — the fair market value comparison drops out because there is nothing left to appraise.²

From whatever preliminary figure you arrive at, subtract any insurance proceeds or other reimbursements you’ve received or reasonably expect to receive.¹ If insurance covers everything, your deductible loss is zero. If a reimbursement is expected but not yet received, you still reduce the loss by what you anticipate. Amend later if it turns out to be less.

The Two Floors on Personal Losses

A personal casualty loss must clear two hurdles before it produces any tax benefit. Business losses face neither.

The first is a $100 per-event floor. If a single hurricane damages your house, your car, and your shed, that’s one event and one $100 reduction against the combined loss.² Two separate storms in the same year would each get their own $100 reduction.

The second is the 10% AGI threshold. After applying the $100 floor to each event, you total your remaining personal casualty losses for the year and reduce that total by 10% of adjusted gross income.¹ Only what exceeds that threshold is deductible. At an AGI of $80,000, the first $8,000 of net casualty losses produces no deduction at all. This alone wipes out the benefit for many taxpayers.

Qualified Disaster Losses Get Better Treatment

Certain specifically designated major disasters receive more favorable rules. Losses from these “qualified disaster losses” are not subject to the 10% AGI threshold, and the per-event floor rises from $100 to $500.⁴ You can also claim a qualified disaster loss without itemizing, which makes the deduction available even if you take the standard deduction.²

Whether a specific event qualifies depends on Congress designating it. Not every federally declared disaster gets this status. Check the current Publication 547 before assuming your loss gets the better treatment.

When Insurance Pays More Than Your Basis

Sometimes insurance pays out more than the property’s adjusted basis. That produces a taxable gain, not a loss.² You can defer that gain under IRC Section 1033 by buying replacement property similar in use, generally within two years after the close of the tax year the gain was realized. For property in a federally declared disaster area, the window stretches to four years.⁵

If you have personal casualty gains and losses in the same year, they net against each other. Non-disaster personal casualty losses can offset personal casualty gains up to the amount of those gains, and the 10% AGI threshold applies only to whatever disaster-related losses remain after netting.⁴

Safe Harbor Valuation for Personal Belongings

Appraising every piece of clothing, furniture, and electronic device destroyed in a disaster is impractical. Revenue Procedure 2018-08 offers two simplified methods.⁴

The de minimis method lets you make a good-faith estimate of the decrease in fair market value when your total loss on personal belongings is $5,000 or less. You keep records describing the affected items and how you arrived at the estimate; no formal appraisal is required.⁴

The replacement cost safe harbor applies to personal belongings in a federally declared disaster area. Determine what it would cost to replace each item new, then reduce that figure by 10% for each year of ownership. If you use this method, you have to apply it to all your personal belongings, with limited exceptions — no cherry-picking the items where the number is largest.⁴

What to Document

The IRS wants proof of three things: that the casualty happened, that you owned the property and can establish your basis, and how much you actually lost. Failing on any one is fatal on audit.

For the event itself, keep police reports, FEMA registration confirmations, insurance claim filings, and any official disaster declaration records tied to your location. For ownership and basis, keep closing statements, purchase receipts, and records of improvements. These set the ceiling on your loss.

For the loss amount, professional appraisals carry the most weight, especially for real estate. A good appraisal details the property’s value immediately before and after the event and attributes the change specifically to the casualty. Contractor repair estimates also work as evidence, provided the repairs address only casualty damage. Before-and-after photos help. Keep everything from your insurance file: the claim, adjuster reports, settlement letters, and reimbursement checks. Hold records at least three years after filing the return that claims the deduction, and longer where you can — the IRS has up to six years to audit when income is substantially understated.

How and When to Report It

Every casualty and theft loss starts on Form 4684. Section A handles personal-use property; Section B handles business and income-producing property.⁶ Complete a separate Section A through line 12 for each distinct casualty event involving personal property.

Personal losses flow from Form 4684 to Schedule A.² You have to itemize to get any benefit, unless the loss qualifies as a qualified disaster loss (which can be claimed without itemizing). If your standard deduction still exceeds your itemized total with the casualty loss included, itemizing won’t help. Business property losses flow from Section B of Form 4684 to Schedule C, E, or F depending on how the property was used.⁴

You generally deduct a casualty loss in the year it occurred. But for a loss from a federally declared disaster, you can elect to deduct it on the return for the immediately preceding tax year.¹ This gets refund money into your hands faster while you’re still dealing with the aftermath. The election deadline is six months after the regular due date (without extensions) for the disaster-year return. For a disaster in 2026, that means October 15, 2027. Make the election on Form 4684, Section D, and attach it to a Form 1040-X amending the prior year.⁷

1
Office of the Law Revision Counsel. 26 US Code 165 – Losses
2
Internal Revenue Service. Topic No. 515, Casualty, Disaster, and Theft Losses
3
Internal Revenue Service. Casualty Loss Deduction Expanded and Made Permanent
4
Internal Revenue Service. Publication 547 – Casualties, Disasters, and Thefts
5
Office of the Law Revision Counsel. 26 USC 1033 – Involuntary Conversions
6
Internal Revenue Service. Form 4684 – Casualties and Thefts
7
Internal Revenue Service. FAQs for Disaster Victims