Form 4684 – Theft and Casualty Losses

 

For tax years 2018 through 2025, you can no longer claim casualty and theft losses on personal property as itemized deductions, unless your claim is caused by a federally declared disaster. You will still use Form 4684 to figure your losses and report them on Form 1040Schedule A.

disaster casualty loss

For tax years prior to 2018 and after 2025, you can only deduct casualty losses not reimbursed or reimbursable by insurance or other means. You’ll need to 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) because only the amount above this limit is deductible.

The following rules are for years prior to 2018 and after 2025.

What is a Casualty Loss?

A casualty loss is damage, destruction, or property loss resulting from one 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

What is The Casualty Loss Deduction?

Deductible casualty losses can result from events like:

  • Car accidents
  • Earthquakes
  • Fires
  • Floods
  • Government-ordered demolition or 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.
  • Mine cave-ins
  • Shipwrecks
  • Sonic booms
  • Storms, like hurricanes and tornadoes
  • Terrorist attacks
  • Vandalism
  • Volcanic eruptions
  • 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 one of these:
    • Casualty loss
    • Ordinary loss
    • Nonbusiness bad debt

Each of these casualties can be claimed as a casualty loss deduction via IRS Form 4684. However, after you make the choice, you can’t change it without permission from the IRS.

What DOESN’T Qualify as a Casualty Loss Deduction?

You can’t deduct a casualty loss if the damage or destruction is caused by any of these:

  • Accidentally breaking items, 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 someone acting for you caused the accident.
  • Progressive deterioration if the damage results from a steadily operating cause or a normal process, like:
    • Steady weakening of a building due to normal wind and weather conditions
    • Deterioration and damage to a water heater that bursts. However, the 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 one 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:
    • Fungus
    • Disease
    • 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 your loss. Otherwise, you can’t deduct the loss as a casualty or theft. However, the portion of the loss not covered by insurance, like a deductible, isn’t subject to this rule. To learn more, see Publication 547: Casualties, Disasters, and Thefts at www.irs.gov.

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:

  • Blackmail
  • Burglary
  • Embezzlement
  • Extortion
  • Kidnapping for ransom
  • Larceny
  • Robbery
  • Fraud or misrepresentation

A theft can be claimed on Form 4684.

Figuring and Proving a Casualty Loss – Form 4684 Instructions

Use the instructions on Form 4684 to report gains and losses from casualties and thefts. Attach Form 4684 to your tax return.

Figuring Out Your Deduction Amount

To figure your deduction for a casualty or theft loss, first figure the amount of your loss. Then follow these instructions to fill out Form 4684:

  1. Figure your adjusted basis in the property before the casualty or theft.
  2. Figure the decrease in fair market value (FMV) of the property resulting from the casualty or theft.
  3. From the smaller of the amounts in steps 1 and 2, subtract insurance or other reimbursement you received or expect to receive.

You will need proof 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

If these records were damaged or stolen, the IRS states you may use “other satisfactory evidence to support it (your case).”

Deducting a Casualty 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

Amount you deduct

The amount you receive includes the total of:

  • Insurance payment
  • 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

Casualty Loss or Theft of Business or Income-producing Property

You can no longer claim any miscellaneous itemized deductions. As a result, business casualty and theft losses of property used in performing services as an employee cannot be deducted nor applied in the netting process to offset gains.

You might suffer a casualty or theft loss to property used in a business, like a vehicle or rental property. If so:

  • You don’t have to reduce the loss amount by the $100 reduction.
  • The 10% of AGI rules don’t apply.

To figure the loss amount, subtract these items from the property’s adjusted basis:

  • Salvage value
  • Insurance proceeds or other reimbursement

You’ll take the loss on Form 4684, Section B.

Need more help with deducting casualty and theft losses? Make an appointment with a tax professional to receive personalized guidance.

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