IRS Pub 547: Casualties, Disasters, and Theft Losses

The casualty and theft loss deduction lets you write off property losses from sudden events or crimes, but for personal-use property it’s available only when the loss stems from a federally declared disaster. Business and income-producing property losses face no such limit. Even when a personal loss qualifies, two reductions cut the deductible amount: a flat $100 per event and 10% of your adjusted gross income. What’s left goes on Form 4684 and, for personal losses, flows to Schedule A as an itemized deduction.

What Counts as a Casualty or Theft

A casualty is damage or destruction from something sudden, unexpected, and unusual. Hurricanes, tornadoes, earthquakes, fires, floods, volcanic eruptions, and vandalism all qualify.¹ Gradual damage doesn’t. Termites, rust, erosion, and normal wear are excluded because they unfold over time rather than in a single identifiable event.

A theft is the illegal taking of money or property, covering robbery, burglary, embezzlement, extortion, and similar crimes. The taking has to be illegal where it happened, and you claim the loss in the year you discover it, not necessarily the year it occurred.²

Some situations that feel like a loss don’t qualify at all. Accidentally breaking something, misplacing an item, or damage caused by a family pet generally isn’t a deductible casualty or theft.

The Federal Disaster Requirement for Personal Losses

This is where most personal claims stop. Since 2018, personal casualty and theft losses are deductible only when the loss results from a federally declared disaster. A house fire caused by lightning in an area that receives a presidential disaster declaration qualifies. The same fire a few miles outside the declared zone does not, even if the damage is identical. The One Big Beautiful Bill Act made this restriction permanent and, starting in 2026, expanded it to include state-declared disasters that are also recognized by the Secretary of the Treasury.³

Business and income-producing property are exempt from this restriction. A fire that destroys equipment used in your trade, or damage to a rental you own, is deductible regardless of any disaster declaration.⁴

One narrow exception exists for personal losses outside a declared disaster. If you have personal casualty gains in the same year, non-disaster personal casualty losses are deductible up to the amount of those gains. A gain arises when your insurance payout exceeds your adjusted basis, which typically happens with over-insured items or property that has appreciated well above its original cost.³

How to Calculate the Loss

The starting figure is the smaller of two numbers: your adjusted basis in the property or the drop in the property’s fair market value caused by the event. You compare what the property was worth immediately before to what it was worth immediately after. If the decrease is less than your basis, use the decrease. If your basis is lower, use the basis. You can never deduct more than you actually invested.²

For thefts, fair market value after the event is zero because the property is gone. The loss on stolen property is simply your adjusted basis, minus any recoveries.²

Adjusted basis is generally what you paid for the property, plus the cost of permanent improvements, minus any depreciation. For a home, that means purchase price plus additions like a new roof or finished basement. For business property, subtract accumulated depreciation as well. Without purchase records and improvement receipts, you may not be able to establish basis at all.

Proving the Drop in Value

Establishing how much value the property lost is often the hardest step. The IRS accepts a competent appraisal from someone qualified to value that type of property. Repair costs can substitute for the FMV decrease if the repairs only restore the property to its pre-casualty condition, the cost isn’t excessive, and the property isn’t worth more after the repairs than before the event.¹

Revenue Procedure 2018-08 offers several safe harbor valuation methods for personal-use residential property that the IRS will not challenge if applied correctly: a repair cost method, a de minimis method for smaller losses, an insurance method using the insurer’s assigned damage value, a contractor method (for federally declared disasters), and a disaster loan appraisal method (also limited to declared disasters). None are mandatory, and if you use one you must account for the value of no-cost repairs, such as volunteer cleanup or donated materials, which reduce the deductible loss.⁵

The $100 Floor and 10% AGI Threshold

Even after calculating your net loss, two statutory reductions cut it further. Both apply only to personal-use property. Business losses skip them entirely.

The first is a flat $100 per casualty or theft event. If one storm damages your car, roof, and fence, that’s one event with one $100 reduction, not three.²

The second reduction catches more people off guard. After subtracting $100 from each event, add up your remaining personal casualty losses for the year and subtract 10% of your adjusted gross income. Only the amount above that 10% threshold is deductible. With an AGI of $80,000, the first $8,000 of net personal casualty loss produces no deduction.³

Qualified Disaster Losses

Losses from congressionally designated disasters get better treatment. For these qualified disaster losses, the per-event floor rises to $500, but the 10% AGI threshold is waived entirely. Qualified disaster losses can also be added to the standard deduction, so you don’t have to itemize to claim them.⁶

Not every federally declared disaster is a qualified disaster. Congress designates specific events through legislation identifying the incident period. Check the current Form 4684 instructions for the list.

Insurance and Other Recoveries

Any reimbursement reduces your deductible loss dollar for dollar. Insurance payouts, government disaster grants, employer aid, salvage value, and legal settlements all count. Your deductible loss is your gross loss minus total recoveries.¹

If your property is insured and you don’t file a timely claim, the portion your policy would have covered isn’t deductible. The IRS treats available-but-unclaimed insurance as if you received it. Only the portion of the loss outside your coverage can potentially be deducted.⁶

If a claim is still pending at year-end and you have a reasonable chance of reimbursement, reduce your loss by the expected recovery. You can’t deduct now and settle up later. If the final payout is less than expected, deduct the difference in the year the amount becomes certain. If it’s more, report the excess as income that year.¹

When Insurance Creates a Taxable Gain

Sometimes insurance pays more than your adjusted basis in the damaged property. That happens often with homes that have appreciated. The excess is a casualty gain, and it’s taxable.

You can defer that gain under the involuntary conversion rules by buying replacement property that serves a similar purpose. The replacement must cost at least as much as the insurance payout; spend less and you’re taxed on the difference.⁷

The replacement deadline is generally two years after the close of the first tax year in which you realize any part of the gain. For a principal residence or its contents damaged in a federally declared disaster, that window extends to four years. Insurance proceeds for unscheduled personal belongings inside a destroyed home are tax-free, and all insurance for the home and its contents is pooled for replacement purposes, so you don’t have to match each destroyed item with a like-kind replacement.⁷

How to Report the Loss

Every casualty and theft loss starts on Form 4684. Section A handles personal-use property; Section B handles business and income-producing property. You enter the FMV before and after, your adjusted basis, insurance proceeds, and the form walks you through the $100 or $500 floor and the 10% AGI calculation.⁸

From there, where the number lands depends on the property type. Personal-use deductible disaster losses transfer to Schedule A as an itemized deduction, and qualified disaster losses can instead increase the standard deduction. Business property losses flow to Form 4797, Sales of Business Property, or to Schedule C for sole proprietors. Income-producing property losses from rentals or investments also run through Form 4797.

For personal losses claimed on Schedule A, the deduction only helps if your total itemized deductions exceed the standard deduction for your filing status.⁹

Claiming a Disaster Loss on the Prior Year’s Return

If your loss occurred in a federally declared disaster area, you can elect to deduct it on the return for the year immediately before the disaster instead of the year it happened. A 2026 disaster loss could be claimed on your 2025 return. The point is speed: amending a prior-year return produces a refund faster than waiting to file for the current year, which matters when you’re rebuilding.³

To make the election, file Form 1040-X for the prior year and attach a completed Form 4684. The loss amount is based on what you know when you file the claim, not the final number, which may still be uncertain while insurance negotiations continue.⁴

Before amending, check whether the casualty deduction actually makes itemizing worthwhile on the prior-year return. If you took the standard deduction that year, you’d need to switch to itemized deductions (and include all your other deductible expenses) for the amendment to pay off, unless the loss is a qualified disaster loss that can increase the standard deduction.⁶

Records the IRS Expects

The IRS denies casualty and theft deductions for lack of documentation, and this is where otherwise legitimate claims fall apart. You need records that establish four things: the event happened, you owned the property, it had a specific value before and after, and your insurance didn’t cover the loss.

For the event itself, keep police reports for thefts, fire department reports for fires, and weather service records or FEMA declarations for natural disasters. Photograph the damage as soon as possible. For federally declared disasters, note the FEMA disaster number and the incident period dates.

For ownership and value, keep purchase receipts, deeds, appraisals, repair estimates from licensed contractors, and insurance assessments. If you’re using the repair-cost method, get itemized estimates showing the work restores the property to pre-casualty condition rather than improving it.

For insurance, keep your claim filing, all correspondence with the insurer, and the final settlement document. Document the absence of coverage too, if that applies. The IRS will want to see you filed a timely claim wherever coverage existed.⁶

Special Situations

Ponzi Scheme Losses

Ponzi victims face unique complications: the loss may not become clear for years, and recoveries through a receiver or trustee keep the final figure uncertain. Revenue Ruling 2009-9 sets the basic formula: your deductible theft loss is the money you actually put in, plus any amounts reported to you as income that you reinvested, minus anything you withdrew and any recoveries you’ve received or reasonably expect to receive.¹⁰ Revenue Procedure 2009-20 provides a safe harbor that fixes the year of the loss and streamlines the calculation so you don’t have to wait for every recovery effort to conclude.¹¹

Because these losses aren’t tied to a federally declared disaster, they run into the disaster-only limit if treated as personal. If the stolen funds were in an income-producing investment, the theft loss may still be deductible as a loss from a transaction entered into for profit, which isn’t subject to the disaster requirement.⁴

Deposits in Failed Financial Institutions

When a bank, credit union, or savings institution becomes insolvent and you lose deposits above the FDIC limit, Publication 547 gives you two ways to handle it. You can treat the loss as a personal casualty loss, but only to the extent of your personal casualty gains for the year, since these losses aren’t disaster-related. Or you can treat it as a nonbusiness bad debt, waiting until the actual loss amount is determined and then deducting it as a short-term capital loss. The choice applies to all your deposits in that institution for the year, and once made it can’t be switched without IRS permission.¹

Losses Larger Than Your Income

A major casualty can produce a loss exceeding all your other income for the year. The excess isn’t lost. It becomes a net operating loss you can carry forward to offset income in future years, even if you’re not a business owner. The mechanics of the carryforward are covered in Publication 536.²

1
Internal Revenue Service. Publication 547 – Casualties, Disasters, and Thefts
2
Internal Revenue Service. Topic No. 515, Casualty, Disaster, and Theft Losses
3
Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses
4
Internal Revenue Service. Instructions for Form 4684
5
Internal Revenue Service. Revenue Procedure 2018-08
6
Internal Revenue Service. Instructions for Form 4684 – Casualties and Thefts
7
Office of the Law Revision Counsel. 26 U.S. Code 1033 – Involuntary Conversions
8
Internal Revenue Service. Form 4684 – Casualties and Thefts
9
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
10
Internal Revenue Service. Revenue Ruling 2009-9
11
Internal Revenue Service. Help for Victims of Ponzi Investment Schemes