Earthquakes, volcanoes, and sonic booms. Storms, fires, and floods. Vandalism, terrorism, and car accidents. All of these fall under the U.S. tax code definition of “casualty losses,” and your losses due to these events may be tax-deductible.
According to the IRS tax code, a casualty loss is the “damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected or unusual.”
As you can tell from the lists of events mentioned above, this definition covers a lot. It’s usually easier to describe what casualty losses are not:
Not sudden: Things that progressively deteriorate over time are not casualty losses. Damage from mold, pests or just the passage of time don’t count under IRS rules. For example, your water heater breaking down after years of use is not a casualty loss, but any sudden water damage to your carpets as a result is.
Not unexpected: If willful or negligent behavior caused the destruction, that’s not a casualty loss. For example, a fire caused by playing with matches is not unexpected, nor is a car accident caused by drinking and driving.
Not unusual: The typical breaking of fragile items like china or glass is not a casualty loss; nor is the common destruction of property by a family pet.
A casualty loss is the “damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected or unusual.”
Why It Matters
If you have a casualty loss, you must first file a timely claim with your insurance company, if you are covered. Being able to prove claim submission and rejection of claims can help support your casualty loss deduction.
After subtracting any insurance payout, the amount of unreimbursed losses greater than 10 percent of your adjusted gross income, minus $100, is generally deductible from your tax return.
Jennifer Peck’s $500,000 home was destroyed by fire. The insurance company agrees on a $475,000 settlement, leaving Jennifer with a $25,000 casualty loss. Jennifer is able to deduct the amount of the loss, minus $100. That is greater than 10% of her adjusted gross income of $50,000. This gives her a potential deduction of $19,900.
There are often special conditions that apply. If you think you have a casualty loss that qualifies, we would be glad to talk it over with you.