By The federal tax law provides relief if a disaster—such as a fire, flood, or hurricane—damages your personal (non-business) property, including your home, belongings, and vehicle. You may be able to deduct these losses from your taxable income, but the rules are complex and often restrictive.
Recent changes to the law have expanded eligibility, allowing more disaster victims to claim these deductions.
Only Losses Due to Federal Disasters Are Deductible
Property losses are deductible only if the U.S. president declares the event a disaster. For example, the loss may be deductible if a wildfire destroys a homeowner’s property and the president designates the wildfire a federal disaster. But the loss is not deductible if the home burns down due to a faulty fireplace.
Only Unreimbursed Disaster Losses Are Deductible
Many, but not all, disaster losses are covered by insurance. You can’t deduct such losses to the extent they are insured. Moreover, if a loss is insured, you must file a timely claim, even if it will cancel your policy or increase premiums. (There’s a different rule for business owners. They can claim business casualty losses without filing an insurance claim.)
The amount of your loss is equal to the smaller of (1) the decrease in the property’s fair market value after the disaster or (2) the property’s adjusted basis before the disaster (usually its cost). You then subtract any insurance or other reimbursement received from the smaller of (1) and (2).
You can use an appraisal or a repair cost to figure out the decline in the property’s fair market value.
Limits on Disaster Losses
There are strict limits on your deduction for disaster losses. The general rule is that the first $100 is not deductible, and then you can deduct your loss only to the extent it exceeds 10 percent of your adjusted gross income (AGI). You may deduct the loss only if you itemize your deductions on IRS Schedule A.
Fortunately, thanks to the Federal Disaster Relief Act of 2023, enacted by Congress in December 2024, the general rule does not apply to federal “major” disaster losses from January 1, 2020, through January 11, 2025.
Instead, losses from such qualified disasters are subject to a $500 floor with no 10 percent AGI threshold. Taxpayers may claim the loss deduction without itemizing and then increase their standard deduction by the amount of their net disaster losses.
Note that January 1, 2020, date. You likely filed that return and others with no loss deduction. You can now file an amended return using the new rules for those wildfire and East Palestine train derailment casualty losses, and you can also exclude some of the disaster area payments you received.
If you want to discuss the tax treatment of disaster losses, please call me on my direct line at 408-778-9651.