Form 4684 – Theft and Casualty Losses
You can only deduct 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). Otherwise, you can’t claim a deduction for that portion of the loss above the limit.
What’s a casualty?
A casualty 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
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 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
- Sonic booms
- Storms, like hurricanes and tornadoes
- Terrorist attacks
- 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
However, after you make the choice, you can’t change it without permission from the IRS.
To learn more, see Publication 547: Casualties, Disasters and Thefts at www.irs.gov.
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:
- 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:
- 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. Then:
- Figure your adjusted basis in the property before the casualty or theft.
- Figure the decrease in fair market value (FMV) 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.
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 Publication 547: Casualties, Disasters, and Thefts at www.irs.gov.
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
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 thatâ€™s:
To find your gain, subtract the adjusted basis of the property at the time of the incident from the amount you receive. It doesn’t matter if the decrease in the fair market value (FMV) 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.
Amount you receive
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
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 Publication 547: Casualties, Disasters, and Thefts at www.irs.gov.
Casualty or theft of business or income-producing property
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, Part II.
If you’ve received unemployment compensation or a state tax refund, you’ll receive Form 1099-G. Learn more about Form 1099-G and how it affects your taxes.
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