NEW LAW EFFECTIVE JANUARY 1, 2018
Much of what you will read below applies to tax returns for 2017 and prior.
The new tax law, effective for tax years beginning after 12/31/2017, eliminated the write-off for personal casualty losses.
However, there is one exception. That is for casualty losses incurred in presidentially declared disaster areas. So if your house catches on fire or car is flooded, you are going to be out of luck tax-wise, unless the casualty was caused by a disaster that affects a wide swath of area, such as a forest fire, hurricane, blizzard, massive flood, earthquake or volcano (like in Hawaii for 2018 - a presidentially declared disaster area).
In general, only itemizers can write off personal losses from a disaster.
Two offsets apply in figuring the deduction that are a carryover from prior law:
(a) You must reduce your loss by a $100 deductible
(b) The balance is deductible only to the extent it exceeds 10% of adjusted gross income.
Generally, you may deduct casualty and theft losses relating to your home, household items and vehicles on your federal income tax return. You may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement, and you reduce the loss by the amount of any reimbursement or expected reimbursement.
A casualty loss can result from the damage, destruction or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration.
A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and it must have been done with criminal intent.
If your property is personal-use property or is not completely destroyed, the amount of your casualty loss is the lesser of:
The adjusted basis of your property, or
The decrease in fair market value of your property as a result of the casualty
The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.
If your property is business or income-producing property, such as rental property, and is completely destroyed, then the amount of your loss is your adjusted basis.
The loss, regardless of whether it is a casualty or theft loss, must be reduced by any salvage value and by any insurance or other reimbursement you receive or expect to receive. The adjusted basis of your property is usually your cost, increased or decreased by certain events such as improvements or depreciation. For more information about the basis of property, refer to Topic 703, Publication 547, Casualties, Disasters, and Thefts, and Publication 551, Basis of Assets. You may determine the decrease in fair market value by appraisal, or if certain conditions are met, by the cost of repairing the property. For more information, refer to Publication 547.
Individuals are required to claim their casualty and theft losses as an itemized deduction on Form 1040, Schedule A (PDF) (or Form 1040NR, Schedule A (PDF), if you are a nonresident alien). For property held by you for personal use, once you have subtracted any salvage value and any insurance or other reimbursement, you must subtract $100 from each casualty or theft event that occurred during the year. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year.
Casualty and theft losses are reported on Form 4684 (PDF), Casualties and Thefts. Section A is used for personal-use property, and Section B is used for business or income-producing property. If personal-use property was damaged, destroyed or stolen, you may wish to refer to Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property). For losses involving business-use property, refer to Publication 584-B (PDF), Business Casualty, Disaster, and Theft Loss Workbook.
Casualty losses are generally deductible in the year the casualty occurred. However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year. Review Disaster Assistance and Emergency Relief for Individuals and Businesses on IRS.gov, for information regarding timeframes and additional information to your specific qualifying event.
Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which it can be determined with reasonable certainty whether or not such reimbursement will be received. I will provide more information on this below.
Special rules may apply to theft losses from Ponzi-type investment schemes. For more information, see the Form 4684 (PDF) and the Form 4684 Instructions (PDF), Casualties and Thefts. Additionally, review Help for Victims of Ponzi Investment Schemes on IRS.gov.
If your loss deduction is more than your income, you may have a net operating loss. You do not have to be in business to have a net operating loss from a casualty. For more information, refer to Publication 536, Net Operating Losses for Individuals, Estates, and Trusts