As a California resident, most of us probably know someone who has suffered some kind of property loss courtesy of an earthquake. The recent Napa earthquake that shook the North Bay is a good reminder that many might be eligible to claim a casualty deduction for your property loss if you suffer property damage during the tax year as a result of a 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.). The casualty deduction is also available if you are the victim of vandalism.
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.
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
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.
To claim a casualty loss deduction on your federal income tax, you must prove to the IRS that you are the rightful owner of the property. Most importantly, you must notify the IRS of any reimbursement you anticipate receiving from an insurance company or a lawsuit that is likely to result in a monetary settlement. You must reduce your deductible loss by these proceeds since the deduction only covers unrecoverable losses.
Claiming the deduction requires you to complete IRS Form 4684. However, if the casualty loss is not the result of a federally declared disaster, you must be eligible to itemize your deductions to claim the loss. You are eligible to itemize on the Schedule A attachment to your return if your total deductible expenses for the year exceed the standard deduction amount for your filing status. As always, please don’t hesitate to call us with any questions.