Casualty Loss for Tax Purposes If Your Property is Damaged or Destroyed in a Natural Disaster

If your property is damaged or destroyed by a natural disaster such as a tornado, hurricane, flood, fire, or earthquake, you may be able to claim a tax deduction for the loss. These types of losses are considered casualty losses for federal income tax purposes. You can claim a deduction to the extent you are not reimbursed for the loss by insurance or other assistance.

The loss you can deduct is your adjusted basis in the property or the decrease in the property's fair market value as a result of the disaster, whichever is less. The amount of the loss would be reduced by any insurance or other reimbursement or assistance you receive, such as qualified disaster assistance payments from FEMA. If the property is business property or income-producing property and is completely destroyed, and the fair market value is less than your adjusted basis, you can claim a casualty loss for your adjusted basis.

Your adjusted basis would generally be your original cost, but may be some other amount, depending on how you acquired the property. To this amount you would add the cost of any additions or major improvements, and subtract any depreciation you claimed on the property if you used it for business, and any casualty losses you previously claimed.

You can determine the decrease in fair market value by getting an appraisal of the property after the casualty. You cannot include the cost of the appraisal as part of the loss, but you could claim a miscellaneous itemized deduction for the appraisal. This miscellaneous deduction is subject to the 2% of adjusted gross income limit. According to the IRS, if you get an appraisal to qualify for a federal loan or loan guarantee as a result of a federally declared disaster, you could use that appraisal to establish the decrease in fair market value.

Or you may be able to use the cost of repairing the property to determine the amount of the decrease in fair market value. You must actually make the repairs, the repairs must be necessary to bring the property back to its former condition, the amount you spend must not be excessive and must only be to repair the damages, and the value of the property after you make the repairs must not be more than it was before the casualty.

You can claim a casualty loss for personal property as an itemized deduction. For each individual casualty loss you must subtract $100. The total amount of all your casualty losses for the year is reduced by 10% of your adjusted gross income.

To claim a casualty loss you need to file Form 4684. Section A of the form is for personal casualty losses and Section B is for losses on business or income-producing property.

According to the IRS, if your property is damaged or destroyed in a federally declared disaster area, you can treat the loss as having occurred in the year before the disaster happened. If you have already filed a return for last year, you can file an amended return to claim the deduction for the casualty loss. You can find a list of federal disaster declarations on the FEMA website.

Sources:

Federal Disaster Declarations, FEMA

Form 4684, Casualties and Thefts, IRS

Publication 547, Casualties, Disasters, and Thefts, IRS