How the federal tax code treats disaster relief and casualty losses

This article explains—step by step—how U.S. federal tax rules apply to casualty losses and disaster relief, who can claim them, how to calculate deductible amounts, where to report them, and the documentation tax professionals expect to see. It focuses on rules in effect through 2025 and points you to official IRS guidance.

Key legal framework (short)

  • Personal casualty and theft losses are deductible only when attributable to a federally declared disaster (Tax Cuts and Jobs Act, 2017; IRS guidance) — this suspension for other personal losses applies for tax years 2018 through 2025. (IRS Pub. 547 and Tax Topic 515)
  • Business and income-producing property losses are generally deductible as ordinary losses and are not limited by the personal-loss suspension.
  • Form 4684, “Casualties and Thefts,” is the primary reporting form; personal losses that pass the test move to Schedule A (itemized deductions). (IRS Publication 547, IRS Tax Topic 515)

(IRS references: Publication 547 — Casualties, Disasters, and Thefts; Tax Topic 515 — Casualty, Disaster, and Theft Losses.)

Who is eligible and how property type matters

  • Individuals with personal-use property (home, car, household goods): you can only claim a casualty loss if the loss is attributable to a federally declared disaster for the year in question. The deduction is claimed on Form 4684 and then on Schedule A if you itemize. (IRS Pub. 547)
  • Businesses and rental/income-producing property owners: casualty losses are generally ordinary losses and reported on Form 4684 with the loss flowing to the relevant business tax return (Schedule C, Form 1065, Form 1120, etc.). The special personal-loss suspension does not apply.
  • Insurance companies or FEMA payments reduce the deductible loss; you must subtract reimbursements from your loss calculation.

Basic calculation rules (personal-use property)

  1. Determine the measure of loss: the deductible amount is the lesser of (a) the decrease in fair market value (FMV) of the property due to the casualty, or (b) the property’s adjusted basis (generally cost basis plus improvements, less depreciation), reduced by any insurance or other reimbursements you receive. For complete destruction, adjusted basis is typically the measure. (IRS Pub. 547)
  2. Subtract $100 for each separate casualty event (the $100-per-casualty rule).
  3. Combine your casualty losses for the year and then reduce the total by 10% of your adjusted gross income (AGI). The remainder—if any—can be claimed as an itemized deduction on Schedule A. These limits still apply to disaster losses that qualify (i.e., federally declared disasters). (IRS Pub. 547)

Example (personal home):

  • Adjusted basis/decrease in FMV: $40,000 (choose the lesser). Insurance paid: $25,000. Net loss before statutory reductions = $40,000 – $25,000 = $15,000.
  • Subtract $100 per casualty: $15,000 – $100 = $14,900.
  • If AGI is $70,000, subtract 10% of AGI: $7,000. Deductible casualty loss = $14,900 – $7,000 = $7,900 (reported on Schedule A via Form 4684).

Example (business property):

  • Business real property with $100,000 damage and no insurance: generally the full $100,000 is reported as an ordinary loss on Form 4684 and flows to the business return; it is not reduced by the $100 rule or 10% of AGI.

Where and how to report (forms and elections)

  • Form 4684 (Casualties and Thefts): used by individuals and businesses to compute casualty and theft losses.
  • Personal casualty losses that survive the $100 and 10%-of-AGI tests: enter on Schedule A (Itemized Deductions) of Form 1040.
  • Business or rental property casualty losses: enter as an ordinary loss on the business or rental schedule (e.g., Schedule C for sole proprietors, Schedule E for rentals, Form 1065/1120 for entities) after completing Form 4684.
  • Special election to claim the loss in the prior year: If your loss results from a federally declared disaster, you may elect under Internal Revenue Code section 165(i) to claim the loss on the return for the year immediately preceding the year the disaster occurred. This election can speed refunds and is made on the return for the prior year (or via an amended return) — consult Pub. 547 for the exact election mechanics and deadlines. (IRS Pub. 547)

Timing, refunds, and accelerated relief

  • Electing to claim the loss on the prior year often accelerates refunds for people who had little tax liability in the disaster year. The IRS provides guidance and may accelerate processing for declared disasters, but expect additional documentation requests.
  • Keep the disaster declaration number and FEMA or state emergency declaration paperwork; these establish the loss as attributable to a declared disaster.

Documentation checklist (what the IRS expects)

  • Proof of ownership and basis (receipts, closing statements, depreciation schedules if rental or business property).
  • Photos and videos documenting the damage with timestamps if possible.
  • Repair estimates, contractor invoices, and canceled checks or bank statements showing payments.
  • Insurance claims correspondence, settlement checks, and denials.
  • FEMA, SBA, or state emergency declaration documents and any disaster-assistance award letters.
  • For the prior-year election: documentation that ties the loss date to the federal disaster declaration.

In my practice I’ve found clear, early documentation is the single most important element to getting a claim processed smoothly. Photograph everything, save email threads with insurers, and keep a dated inventory of lost household items with approximate original costs.

Practical considerations and common pitfalls

  • Do not double-count insurance proceeds. Reimbursements (including FEMA grants for temporary housing or repairs) reduce your deductible loss.
  • Don’t assume every severe weather event qualifies—losses must be attributable to a federally declared disaster for personal-use property to be deductible under current law. Check the FEMA and IRS disaster declaration lists for the affected period. (FEMA and IRS Tax Topic 515)
  • Timing errors: If you miss the prior-year election window, you can still claim the loss in the disaster year, but you may lose accelerated refund opportunities.
  • Valuation disputes: The IRS may challenge FMV reductions. Keep independent repair estimates or appraisals when possible.

Interaction with insurance and disaster assistance

  • First file insurance claims. The deductible you pay under your insurance policy is not a tax deduction unless it meets other casualty-loss rules.
  • Small federal grants designed for basic needs (housing/shelter) are often not taxable, but may affect the calculation of a casualty-loss deduction if characterized as reimbursement — document their purpose and ask the issuing agency for a tax determination if uncertain. (Consumer Financial Protection Bureau and FEMA guidance can help explain benefit types.)

Common use cases

  • Homeowner hit by a federally declared hurricane: may elect prior-year treatment or claim in the disaster year; apply $100-per-casualty and 10%-of-AGI rules if personal-use property.
  • Business with uninsured equipment destroyed by wildfire: generally take an ordinary loss on the business return; no $100 or 10%-of-AGI rules.
  • Renter whose personal property is destroyed in a federally declared flood: similar to homeowners, but basis is the cost of the items; document cost/age to substantiate reasonable replacement values.

Where to read the official guidance

Additional on-site resources from FinHelp:

Professional tips

  • If you’re close to the 10%-of-AGI threshold, consider whether additional eligible expenses (medical expenses from the disaster or casualty-related moving costs for business) can be aggregated appropriately—consult a tax professional.
  • If insurance is delayed or denied, preserve denial letters and proof of follow-up; the IRS will want to see efforts to obtain reimbursement.
  • When in doubt, get an independent appraisal for real property (especially for major losses) and save contemporaneous evidence (photos, date-stamped documents).

Frequently asked questions (brief)

  • Can I deduct a loss from a flood that was not declared a federal disaster? Generally no for personal-use property; check if your area received a federal disaster declaration. (IRS Tax Topic 515)
  • Are business casualty losses treated differently? Yes—business and rental property losses are generally deductible as ordinary losses and not subject to the $100/$10% personal rules.
  • What form do I use? Form 4684; personal losses that qualify go to Schedule A. Business losses flow to your business tax forms after Form 4684.

Professional disclaimer

This article is educational and reflects federal tax law as enacted and interpreted through 2025. It is not individualized tax advice. For decisions that affect your tax return—particularly elections to claim losses in a prior year or complex business casualty claims—consult a qualified tax advisor or CPA who can review your records and help you complete the necessary forms.