Deducting Casualty Losses

In tax terms, a casualty is not necessarily the loss of life—instead, casualties could be the damage, destruction or loss of property resulting from a sudden, unexpected or unusual event.

Casualties caused by federally declared disasters can be devastating, so taxpayers can usually claim casualty loss deductions on their tax returns.

What kind of property counts towards casualty losses?

Land, homes, vehicles, and other types of personal property can all go towards your casualty loss deduction—the big question is whether or not you can provide documentation that the item was lost or destroyed, or decreased in fair market value (what someone would reasonably pay for your item immediately before the disaster).

How do I calculate my deductible losses after a disaster?

To calculate how much of the casualty losses you can deduct, first determine the smaller of the two following figures:

• The decrease in fair market value of the property since the disaster
• The adjusted basis of the property, or what it cost you to restore the property

Once you’ve determined the smaller of those two amounts, subtract any insurance benefits you received, and there you have it—the amount you can deduct. There are other deduction limits that could affect you, but generally, that’s how casualty losses are calculated for your taxes.

How do I determine fair market value?

Since fair market value (FMV) is the price at which the property could be reasonably sold, it’s generally calculated by comparing FMV immediately before and after a casualty. That can be tricky, especially because FMV has to be determined by an appraisal, so the cost of cleaning up or making certain repairs is acceptable under certain conditions as evidence of the decrease in FMV.

How do I prove FMV when I file my taxes?

Here are some examples of documentation from the IRS page on determining fair market value after a disaster.

For homes or real estate:

• Contact the title company, escrow company or bank that handled the purchase of the home to get copies of appropriate documents. Real estate brokers may also be able to help.
• If improvements were made to the home, contact the contractors who did the work to see if records are available. If possible, get statements from the contractors verifying their work and cost.
  • Get written accounts from friends and relatives who saw the house before and after any improvements. See if any of them have photos taken at get-togethers.
  • If there is a home improvement loan, get paperwork from the institution that issued the loan. The amount of the loan may help establish the cost of the improvements.

For vehicles:

• Use online resources to determine FMV like:
  • Kelley’s Blue Book
  • National Automobile Dealers Association
  • Edmunds
• Call the dealer where the car was purchased and ask for a copy of the contract. If this is not available, give the dealer all the facts and details, and ask for a comparable price figure.
• If making payments on the car, check with the lien holder.

For other personal property:

• Look on mobile phones for pictures that were taken in the home that might show the damaged property in the background before the disaster.
• Check websites that can help establish the cost and fair market value of lost items.
• Support the valuation with photographs, videos, canceled checks, receipts or other evidence.
• If items were purchased using a credit card or debit card, contact the credit card company or bank for past statements. Credit card companies and banks often provide user’s access to these statements online.

Do I have to deduct casualty losses in the year they occurred?

Not necessarily. If the property was damaged by a federally-declared disaster, you can choose whether to deduct it for the current year or amend the prior-year return to deduct the losses there.

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