Casualty Loss Deductions for Personal and Business Property

Many businesses and individuals have recently suffered casualty losses, which include losses due to floods, tornadoes, fires, other acts of nature, theft, embezzlement and other sudden, unexpected or unusual events. The casualty loss rules differ for personal, trade or business, or income-producing property.

The 2017 Tax Cuts and Jobs Act (TCJA) limited tax deductions on personal-use property casualty losses, so only those casualty losses attributable to a federally declared disaster area are deductible for tax years beginning after 2017.

Here is a summary of the current rules.

Casualty Losses for Trade/Business or Income-Producing Property

Casualty losses of trade or business property or income-producing property (such as rental or royalty income-producing properties) are allowed regardless of the federal disaster area status in which the loss was incurred.

The amount of the allowed casualty loss depends on whether or not the property was completely destroyed:

• If the property was not a total loss, the deductible loss (i.e. the loss incurred less any insurance reimbursement) is the lesser of the property’s:
  • adjusted tax basis (i.e., the original cost of the property plus any improvements less any depreciation previously deducted) immediately before the loss or
  • decline in fair market value due to the casualty, which may be determined by appraisal or cost of repairs (see the IRS FAQs for Disaster Victims).
• If the property was totally destroyed, the deductible loss is equal to the property’s adjusted tax basis before the loss less any salvage value and insurance reimbursement.

Gains on business or income-producing casualties are eligible for deferral under Section 1033.

Federally Declared Disaster Area Losses for an Individual Taxpayer’s Personal-Use Property

Under the TCJA, if a casualty loss is incurred in a location that is not declared a federal disaster area, the loss is only deductible to the extent of casualty gains. Generally, federal disaster area losses related to an individual taxpayer’s personal-use property including homes, household items and vehicles are deductible for federal income tax purposes. Losses should first be reduced by any reimbursement received or anticipated and any salvage value.

The amount of casualty loss is the lesser of the adjusted basis of the property, immediately prior to the disaster, or the decrease in fair market value as a result of the casualty. The decrease in fair market value may be determined by appraisal or cost of repairs (see the IRS FAQs for Disaster Victims).

Each casualty loss in a federal disaster area is allowed to the extent it exceeds $100 and 10% of adjusted gross income.

Insights

2021 casualty losses can be deducted on either the 2021 tax return or the 2020 tax return, if not already filed. Proactively educating yourself on this subject will help simplify the process of gathering and retaining data during a difficult period.

As damage assessments can take some time, we recommend keeping detailed records of any costs incurred, reimbursements received or anticipated, and appraisals performed in the year a loss is incurred. If a personal loss occurs in a federal disaster area, having these documents compiled will greatly simplify determining any deductible loss. The information necessary to determine your adjusted basis in the property damaged should be accumulated and assembled during this assessment period.

If you have any additional questions or need assistance, reach out to our experts.