Background

Casualty loss deductions are governed by Section 165 of the Internal Revenue Code and explained in IRS resources such as Publication 547 and Tax Topic 515 (Casualty, Disaster, and Theft Losses) (IRS: Publication 547; IRS: Tax Topic 515). The Tax Cuts and Jobs Act (TCJA) suspended personal casualty and theft deductions for tax years 2018–2025 except for losses attributable to federally declared disasters; business and investment casualty losses are treated differently and generally remain deductible.

Why recent court rulings matter

In the past few years, U.S. Tax Court and other courts have clarified issues courts often dispute: whether an event qualifies as a casualty (“sudden” or “unexpected”), the correct method to measure loss (decrease in fair market value or adjusted basis), and what documentation is required to substantiate claims. Those rulings matter because they affect:

  • Eligibility (is the event a casualty under the statute?),
  • The deductible amount (how to measure the loss), and
  • Audit risk (what evidence will satisfy the IRS and a court).

How casualty loss deductions are calculated (practical steps)

  1. Identify whether the loss is personal, business, or investment-related. Personal casualty losses are only deductible for federally declared disasters through 2025; business/investment losses follow different rules.
  2. Measure the loss. For each casualty, compute the lesser of: (a) the decrease in fair market value (FMV) caused by the casualty or (b) your adjusted basis in the property. Subtract any insurance or other reimbursements.
  3. Apply required reductions. For personal casualty losses attributable to a federally declared disaster, reduce each loss by $100 and then combine losses and subtract 10% of your adjusted gross income (AGI) before claiming the deduction on Schedule A (see IRS Pub. 547) (IRS: Publication 547).
  4. Report the loss. Use Form 4684 to report casualty and theft losses; carry the result to Schedule A (personal) or the appropriate business return.

Example (simplified)

A homeowner has $50,000 of storm damage. Insurance paid $12,000. If the decrease in FMV equals $50,000 and the adjusted basis is higher, the casualty amount before reductions is $38,000 ($50,000 − $12,000). For a personal loss attributable to a federally declared disaster, subtract $100, then reduce by 10% of AGI when totaling itemized deductions.

Who is affected

  • Homeowners in federally declared disasters (can still claim personal casualty losses through 2025).
  • Small-business owners and landlords (business casualty losses are generally deductible and handled on business returns).
  • Renters and investors (investment property losses follow business/investment rules).

Documentation and audit-proofing checklist

  • Photos/videos of damage dated before repairs,
  • Pre-loss and post-loss FMV evidence (appraisals, broker opinions, comparable sales),
  • Receipts and invoices for repairs and replacement,
  • Insurance claims, settlement letters, and proof of cash flows (checks, deposits),
  • Professional appraisals when values are disputed.

What courts have emphasized (practical implications)

  • Burden of proof: Courts often require contemporaneous documentation supporting valuation and causation.
  • Valuation method: Tax courts may prefer a clear, consistent valuation approach (FMV comparisons supported by appraisals or market data).
  • Causation and timing: Establish a direct link between the casualty event and the loss; identify when the loss occurred.

Common mistakes to avoid

  • Assuming all property damage qualifies—personal losses are limited post‑TCJA unless tied to a federally declared disaster.
  • Failing to subtract insurance proceeds or to document settlements.
  • Lacking before-and-after valuation evidence or delaying appraisals.

If a recent ruling affects your case

  • Re-examine your documentation and valuation methods in light of the court’s reasoning.
  • Consider amending prior returns only if professional advice supports a stronger position (watch statute of limitations rules).
  • Get an independent appraisal or a forensic accounting report when values are disputed.

Resources and next steps

Professional guidance and disclaimer

This article is educational and not a substitute for personalized tax advice. Court rulings can raise complex, fact-specific issues—consult a CPA, tax attorney, or enrolled agent if you have a sizable loss or a disputed valuation. In my practice, I recommend keeping contemporaneous evidence and obtaining an independent appraisal early to reduce audit risk.

Authoritative sources

(Updated: 2025)