Navigating tax relief after disasters: Understanding casualty loss deductions

Casualty losses caused by sudden or unexpected events, such as the 2025 California wildfires, can leave homes and vehicles destroyed, and businesses inoperable for a multitude of reasons.

In situations such as these, there might be opportunities to seek tax relief to ease the financial burden through enhanced deductions, income exclusion, and extended filing and payment deadlines.

By understanding the qualifying criteria, exclusions, and calculation methods outlined in Internal Revenue Code (IRC) Section 165 and related Treasury Regulations, taxpayers can navigate the process more effectively.

Casualty losses

Casualty losses can provide relief to individuals and businesses who suffer property damage or destruction due to unforeseen events. The IRC Section 165 and related Treasury Regulations establish the framework for understanding what constitutes a casualty loss and when taxpayers can claim deductions.

Understanding casualty losses and their application

The IRS allows taxpayers to deduct losses resulting from sudden, unexpected, or unusual events. These events include natural disasters, thefts, and accidents that damage or destroy property. For a loss to qualify, it must be:

• Physical. Casualty losses apply to tangible property damage.
• Identifiable. The loss must stem from a specific and identifiable event, such as a fire, hurricane, or earthquake.
• Sudden, Unexpected, and Unusual. This means the event occurs quickly, not gradually over time, it wasn’t anticipated or intended by the taxpayer, and isn’t part of normal daily activities or wear and tear.

What doesn’t qualify as a casualty loss?

Certain types of property damage or loss are excluded under IRC Section 165. These include:

• Progressive Deterioration. Damage caused by wear and tear, rust, corrosion, or termites doesn’t qualify.
• Voluntary Acts. Losses resulting from taxpayer negligence or intentional acts aren’t deductible.
• Market Losses. A decline in property value due to market conditions or changes in law isn’t a casualty loss.
• Non-Tangible Losses. Emotional or reputational damages don’t qualify.

Calculating a casualty loss deduction

The amount of the loss is generally determined by the lesser of the decrease in fair market value (FMV) immediately before and after the casualty or the adjusted cost basis of the property. Then, the lesser value is reduced by any insurance or other reimbursements received. The cost of repairs can be used as a measure of the decrease in FMV if such repairs restore the property to its pre-event condition.

The following limitations apply to casualty losses on personal-use property:

• The first $100 of each casualty loss isn’t deductible
• The total casualty loss deduction for personal-use property is limited to the amount that exceeds 10% of the taxpayer’s adjusted gross income (AGI)
• For tax years 2018 through 2025, personal casualty losses are generally deductible only if they’re attributable to a federally declared disaster or to offset personal casualty gains

Record-keeping and documentation considerations

Proper documentation is essential for claiming a casualty loss deduction. Taxpayers should:

• Take photographs of the damage
• Obtain repair estimates or appraisals
• Retain receipts for repairs and replacements
• Keep copies of insurance claims and reimbursements

Special considerations for federally declared disasters

Federally declared disasters include any area designated as such by the Federal Emergency Management Agency (FEMA). Visit the FEMA website for a current list of disasters and updates, which includes the California and Maui wildfires as well as Hurricane Helene.

Election to deduct in preceding year

Taxpayers who suffer a casualty loss due to a federally declared disaster can elect to deduct the loss on their federal income tax return for the taxable year immediately preceding the year in which the disaster occurred.

The disaster loss can be deducted on either an original or amended federal tax return for the preceding year. This provides taxpayers with the flexibility to potentially receive a tax refund sooner by applying the loss to the prior year tax return.

Additional relief for specific qualified federally declared disasters

The Federal Disaster Tax Relief Act of 2023, signed into law on Dec. 12, 2024, provides more generous provisions for qualified disaster-related personal casualty losses. Specifically, the law removes the usual requirement that losses are only deductible if they exceed 10% of an individual’s AGI and allows casualty loss deductions in excess of $500 floor per casualty. The law also allows taxpayers to claim the qualifying losses above the line, providing a deduction for taxpayers even if they don’t itemize.

According to IRS Publication 547, disasters that meet all the following criteria are considered a qualified disaster for purposes of the enhanced personal use casualty loss under the Federal Disaster Tax Relief Act of 2023:

• Federal disaster declared between Jan. 1, 2020, and Feb. 10, 2025
• Disaster incident period began on or after Dec. 28, 2019, and on or before Dec. 12, 2024
• Disaster ended no later than Jan. 11, 2025

This includes recent disasters such as Hurricane Helene, Hurricane Milton, Hurricane Ian, and wildfires in Maui and on the west coast.

However, because the 2025 wildfires in Los Angeles began on Jan. 7, 2025, which is past Dec. 12, 2024, and continued beyond Jan. 11, 2025, current guidance suggests that they don’t meet the criteria of a qualified disaster and don’t qualify for the enhanced personal casualty loss deduction under current law.