Casualty or Theft Losses in content page of articles
Claim casualty and theft losses on personal property as itemized deductions. Use Form 4684 to figure your losses and report them on Form 1040, Schedule A.
You can only deduct losses not reimbursed or reimbursable by insurance or other means. You must subtract $100 from each casualty loss of personal property. The total of your casualty and theft losses on personal property must be more than 10% of your adjusted gross income (AGI). Otherwise, you can’t claim a deduction for that portion of the loss above the limit.
Ex: A burglar breaks into your apartment and steals $10,000 worth of cash and uninsured valuables. Your AGI for the year is $50,000, and this is the only loss you suffered during the year.
Before claiming a deduction for this theft, subtract $100 from the loss. Then, subtract 10% of your AGI from the remaining $9,900. Your deductible loss is $4,900:
$10,000 - $100 - $5,000 (computed as $50,000 x .10) = $4,900
If your AGI had been $95,000 or more, you wouldn't be able to claim the loss.
What's a Casualty?
A casualty is damage, destruction, or property loss resulting from 1 of these identifiable events:
Sudden event -- swift, rather than gradual or progressive
Unexpected event -- ordinarily unanticipated and unintended
Unusual event -- not a day-to-day occurrence
Deductible casualty losses can result from events like:
Car accidents (See Nondeductible Losses below for exceptions.)
Fires (See Nondeductible Losses below for exceptions.)
Government-ordered demolition or the relocation of a home that's unsafe to use because of a disaster. A disaster is an event that occurred in an area the president declares eligible for federal assistance.
Storms, including hurricanes and tornadoes
Loss on deposits when a bank or other financial institution becomes insolvent or bankrupt. If you incurred this type of loss, you can deduct it as 1 of these:
Nonbusiness bad debt
However, after you make the choice, you can't change it without the IRS’s permission.
To learn more, see IRS Publication 547: Casualties, Disasters and Thefts.
You can't deduct a casualty loss if the damage or destruction is caused by any of these:
Accidentally breaking articles, like glassware or china, under normal conditions
Damage a family pet does, unless the casualty requirements are met. Ex: Your new puppy who's not housebroken damaged your antique Oriental rug. Since the damage isn't unexpected or unusual, you can't deduct the loss.
Fire you willfully set or you paid someone else to set
Car accident if your willful negligence or willful act caused it. The same is true if the willful act or willful negligence of someone acting for you caused the accident.
Progressive deterioration if the damage results from a steadily operating cause or a normal process, rather than from a sudden event, like:
Steady weakening of a building due to normal wind and weather conditions
Deterioration and damage to a water heater that bursts. However, the rust and water damage to rugs and drapes caused by the bursting of a water heater qualifies as a casualty.
Most losses of property caused by droughts. To deduct it, you must have incurred a drought-related loss in 1 of these:
Trade or business, like farming
Transaction entered into for profit
Termite or moth damage
Damage or destruction of trees, shrubs, or other plants by:
Insects, worms, or similar pests. However, a sudden destruction due to an unexpected or unusual insect infestation might result in a casualty loss.
Failure to File an Insurance Claim for Reimbursement
If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. Otherwise, you can't deduct the loss as a casualty or theft. However, the portion of the loss usually not covered by insurance, like a deductible, isn't subject to this rule. To learn more, see IRS Publication 547: Casualties, Disasters, and Thefts.
Ex: You have a car insurance policy with a $500 deductible. Since your policy doesn't cover the first $500 of damages due to a car accident, you can deduct the $500. The $500 loss is subject to the $100 reduction and 10% of AGI rules. This is true whether or not you file an insurance claim since your insurance carrier won't reimburse you for the deductible.
What's a Theft?
A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be:
Illegal under the law of the state where it occurred
Done with criminal intent
Theft includes the taking of money or property by:
Kidnapping for ransom
Fraud or misrepresentation
Figuring and Proving a Loss
To figure your deduction for a casualty or theft loss, first figure the amount of your loss:
Determine your adjusted basis in the property before the casualty or theft.
Determine the decrease in fair market value of the property resulting from the casualty or theft.
From the smaller of the amounts in steps 1 and 2, subtract insurance or other reimbursement you received or expect to receive.
Ex: A fire destroys a sofa you bought 10 years ago for $1,000. Before it was destroyed, you could have sold the sofa for $500. Now, to replace the lost sofa with a comparable sofa, you'll pay $1,800. Your casualty loss is the decrease in fair market value caused by the fire ($500) and not the replacement cost nor the original cost.
You should prove a casualty caused your loss. So, keep newspaper accounts and other proof showing the type of casualty that struck your area and the amount of damage it did.
To prove the amount of your loss, you should have:
Purchase receipts for the affected property
Receipts for improvements made to the affected property
Pre- and post-casualty appraisals for the affected property
To learn more, see IRS Publication 547: Casualties, Disasters, and Thefts.
Deducting a Loss in a Presidentially Declared Disaster Area
If your loss is part of a presidentially declared disaster, you can deduct the loss on your prior-year return. If you've already filed your prior-year return, you can file an amended return to claim the deduction.
Claiming a qualifying disaster loss on your prior-year return:
Could result in a lower tax for that year
Often produces or increases a cash refund
Might let you get your money months earlier than if you wait to claim your loss on your current-year return
Ex: A tornado caused $100,000 of uninsured damage to your home in July 2012. The tornado also caused a considerable amount of property damage in your town. So, the president declared the area a federal disaster area. And since your loss occurred in a presidentially declared disaster area, you can deduct the loss on your home on your:
2011 return filed in April, which you can amend to get your money back earlier
2012 return, which you can’t file until after Dec. 31, 2012
Casualty or Theft Gain
It's possible to have taxable gain after a casualty or theft. You have a gain if you receive an insurance payment or other reimbursement that's more than your adjusted basis in property that’s:
To figure your gain, subtract the adjusted basis of the property at the time of the casualty or theft from the amount you receive. It doesn't matter if the decrease in the fair market value of your property is less than the adjusted basis of your property. No matter what, you must use the adjusted basis to figure the gain.
Ex: A flood destroyed personal property in the basement of your home. You had a replacement value rider attached to your homeowner's insurance policy. The replacement value paid by your insurance company is $25,000. Your adjusted basis in the personal property is only $15,000. Your taxable gain from the insurance reimbursement is $10,000.
Amount You Receive
The amount you receive includes the total of:
Value of property you received minus expenses you incurred while pursuing reimbursement
Reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property
Ex: A hurricane destroyed your main home. The insurance company gave you $140,000 in cash and gave the property’s mortgage holder $5,000. So you actually received $145,000, which includes the $5,000 mortgage reimbursement.
Reporting a Gain
Usually, you must report your gain as income in the year you receive the reimbursement. However, you don't have to report your gain if you:
Meet certain requirements
Postpone reporting the gain by buying replacement property
To learn more, see the Postponement of Gain chapter in IRS Publication 547: Casualties, Disasters, and Thefts.
Casualty or Theft of Business or Income-Producing Property
If you suffer a casualty or theft loss to property used in a business, like a vehicle or rental property:
You don’t have to reduce the loss amount by the $100 reduction.
The 10% of AGI rules don't apply.
Figure the loss amount by subtracting these items from the property’s adjusted basis: