Casualty Loss Deduction: How To Claim A Tax Break If Disaster Hits

When a disaster strikes, you’re thinking about the safety of yourself and your loved ones, sometimes followed by the daunting task of rebuilding your home. Taxes are likely the furthest thing from your mind.

But when the dust settles, the government does offer some tax assistance for disaster victims in the form of a casualty loss deduction. While calculating the deduction can be complicated, it can be a significant benefit to those who have endured a major loss.

What is a casualty loss?

A casualty loss is defined by the IRS as the damage, destruction or loss of property that results from unexpected events, including floods, hurricanes, tornadoes, fires, earthquakes or volcanic eruptions. (See this IRS page for more.)

In general, for tax years 2018 through 2025, losses must have taken place during federally declared disasters in order to qualify for the casualty loss deduction. Federal declaration was required for the tax deduction as a result of the Tax Cut and Jobs Act of 2017, says Beth Brennan, CPA, vice chair of the disaster tax relief task force at the American Institute of CPAs.

That limitation was set to expire in 2025, but the recent One Big Beautiful Bill Act (OBBBA) made it permanent. But OBBBA added a new perk: Losses due to state declared disasters are eligible for the deduction, starting in 2026.

“If you have a house fire that’s caused by faulty wiring or roof damage from a rainstorm that doesn’t receive any sort of declaration by the governor or the president, none of those are eligible for a tax deduction,” Brennan says.

How to claim the casualty loss deduction

Say you’ve established that your property loss was caused by a federally declared or, starting in 2026, a state-declared disaster. Next, you need to determine whether the event was a “qualified disaster” — a distinction that allows for more beneficial tax treatment, Brennan says.

“Qualified disasters” are designated by Congress. Most recently, as a result of OBBBA, major disasters declared by the president between Jan. 1, 2020 and Sept. 2, 2025 are now classified as qualified disasters, Brennan says. That’s in addition to the previous qualified disasters before that time period.

For some, this change may prompt them to amend a previous tax return. “In my own practice, I had clients who had losses attributable to Hurricane Ida,” Brennan says. Prior to legislation approved late last year, Hurricane Ida, which occurred in 2021, was not considered a qualified disaster. When the law was passed, it gained qualified disaster status.

“So we had to go through the exercise of considering whether an amended return was warranted,” she says.

What does all of this mean for your deduction? Let’s dive into how different types of disaster designations can affect your taxes.

Federally declared disaster — but not a ‘qualified disaster’

First, let’s consider a loss due to a federally declared disaster (or, starting in 2026, a state-declared one) that is not considered a qualified disaster. Here’s what taxpayers need to do to calculate the dollar amount of their deductible loss:

• Subtract any insurance reimbursement
• Subtract $100 from each casualty event
• Subtract 10 percent of your adjusted gross income

The result is the allowable casualty losses for the year. Taxes must be itemized to take this deduction.

Federally declared disaster — and it is a ‘qualified disaster’

Now, let’s say the loss was due to a federally declared (or, after 2025, a state-declared) disaster, and it’s also a so-called “qualified disaster.” If so, taxpayers can take the deduction without itemizing taxes — that means they can claim the standard deduction even as they also benefit from claiming disaster losses.

What’s more, with a qualified disaster, the taxpayer’s net casualty loss doesn’t need to be more than 10 percent of their adjusted gross income. In this scenario, however, they’d need to subtract $500 (instead of $100) from each casualty event to calculate the deduction.

Casualty loss deduction example

To better illustrate, Brennan offered this example: Consider a taxpayer whose main home was damaged in a hurricane. The event was considered a federally declared disaster, making the homeowner eligible for a tax deduction. (After 2025, a state-declared disaster may also mean the homeowner is eligible for a tax deduction.)

Before the hurricane, the fair market value of the property was $200,000. After the disaster, the property was worth $140,000. That’s a $60,000 decline in value. Insurance reimbursed the homeowner $45,000 for the damage, leaving a $15,000 casualty loss for the taxpayer to bear. The taxpayer’s adjusted gross income for the tax year was $100,000.

With the above assumptions in mind, below are two calculations for the deduction. One uses the general rules, the other uses the rules for qualified disasters.

Keep in mind, these calculations are for individuals. Businesses face different rules for claiming disaster losses. Also, in some specific cases, theft losses may also qualify for a casualty loss deduction.

Another thing to keep in mind? The casualty loss deduction is complex. Here is some of the fine print that Brennan shared for the above example:

The cost of the home and land was $175,000. Of the original total cost, $25,000 was allocable to land and $150,000 was allocable to the home. No improvements were made to the home between the original purchase and disaster. The fair market value (FMV) of the property immediately before the disaster was $200,000. The FMV immediately afterward was $140,000, a decline of $60,000. The taxpayer’s insurance company paid $45,000 for the damage to the home. The amount of the insurance payment is subtracted from the lesser of the adjusted basis or decline in FMV. The resulting amount is either a casualty loss or a casualty gain. The lesser of adjusted basis or decline in FMV is $60,000 ($150,000 adjusted basis vs. $60,000 decline in FMV). The taxpayer’s casualty loss is $15,000 ($60,000 – $45,000 = $15,000).

Consider hiring a tax pro

The process of claiming the deduction can be confusing. Often, it’s best to consult a tax professional to help you sort it out.

“Running afoul of the dates and different qualification levels is probably one of the biggest things that folks have issues with,” says Julie Emanuele, senior tax manager at Keiter, an accounting firm based in Glen Allen, Va.

People must also understand the effect that insurance coverage has on their eligibility; any reimbursement for damage that you get for insurance won’t be eligible for the deduction, she says.

More time to file your tax return

In addition to the casualty loss deduction, the Filing Relief for Natural Disasters Act passed this summer extended federal tax filing deadlines for those impacted by a disaster.

Now, taxpayers who qualify are eligible for a 120-day extension to file, an increase from 60 days. The extension is automatic for those in federally designated disaster areas; those affected by qualified state-declared disasters are also eligible — upon the request of the state governor.

“Which is great, because I don’t know if you’ve ever been involved in a natural disaster, but 60 days isn’t enough time to generally get back on your feet,” Emanuele says.

Prepare your documents

It pays to stay prepared — just in case you end up having significant property loss due to a disaster, Brennan says.

“Take photos of your property periodically to record pre-disaster conditions. Take photos immediately after to document damage. Keep important documents available digitally,” she says, including insurance policies.

“If you’re not a digitally storing kind of person, then keep a large envelope or a plastic Ziploc bag with all your important documents and receipts that accumulate as you begin to clean up and undergo the repair process,” she says.

“All of these contain information that will be critical in the preparation of a tax return where a casualty loss deduction might come into play,” Brennan says.