June 16, 2025 - Guidelines for supporting a casualty loss due to a Federally-declared disaster

This document sets forth items that should be documented and available to support a claim for a casualty loss caused by a Federally-declared disaster.

General: The Internal Revenue Code allows a taxpayer to deduct losses attributable to casualty events (e.g., fires, floods). These losses are subject to specified limitations and must be documented to establish the amount of the loss claimed.

• Most critically, casualty losses incurred before 2026 are only deductible to the extent they are the result of a Federally-declared disaster (or to the extent of personal casualty gains, like taxable insurance recoveries).
• Property must sustain physical damage on account of which the casualty loss is claimed. For example, a loss sustained through a decline in value as a result of a casualty will generally not be deductible. Note: The losses must affect the primary residence or primary place of business.
• Additionally, depending on the Federally-declared disaster causing the loss, the losses may be limited.
• Generally, the Internal Revenue Code disallows the first $100 of any single casualty loss and further sets a floor of 10% of the taxpayer’s adjusted gross income (AGI) before casualty losses are deductible.
• However, the Federal Disaster Tax Relief Act of 2023, enacted December 12, 2024, changes the above thresholds for casualty losses attributable to certain Federally-declared disasters.
• The Act is applicable to casualty losses occurring as a result of Hurricanes Ian, Nicole, Idalia, Helene, Debby, and Milton.
• The Act allows taxpayers to deduct casualty losses once they exceed $500 and eliminated the 10% AGI threshold for claiming those losses.
• For Federally-declared disasters, the IRS asks for the DR or EM declaration number assigned by FEMA, which can be found at FEMA.gov/Disasters.
• Additionally, the loss claimed must be based on the difference between the affected property’s value pre- and post-casualty, and is limited to the tax basis of the property at the time of the casualty.
• For instance, assume a taxpayer owns property with a value of $1 million and a tax basis of $400,000, and the property’s value was reduced to $500,000 as a result of Hurricane Nicole. The maximum casualty loss the taxpayer can claim is $400,000, even though the taxpayer’s economic loss may be $500,000.
• In this example, since the loss was attributable to Hurricane Nadine, the 10% AGI threshold is not applicable.

Recommended documentation: It is recommended that the following facts/items be documented to support the claimed casualty loss.

• Nature of casualty and when it occurred; e.g., narrative description of damage, what it was caused by, and when it happened. For example, “flood damage to personal residence caused by Hurricane Y that occurred DateX.” It would be advisable to include specific details about the damage that occurred as well, for example, listing out the damaged components of a personal residence.
• That the loss was the direct result of the casualty; this could be a narrative description of the surrounding events; e.g., “residence was located in area that experienced high winds and flooding due to Hurricane X, and the winds and flooding caused substantial damage to the residence.”
• Values before and after casualty. This is the critical element supporting the amount of the loss claimed.
• Applicable regulations provide that losses to property can be documented by a competent appraisal immediately before and immediately after the casualty.
• Any appraisal should distinguish diminution in value attributable to the casualty itself from any general diminution in value affecting properties in the casualty area attributable to the casualty event generally.
• For example, if homes in a particular area generally experienced a 10% drop in market value due to a hurricane, regardless of damage, this general diminution in value would not be recoverable as a casualty loss.
• See discussion of “safe harbor” methods available to establish the amount of a casualty loss, below.
• Repair costs can also be used to measure the decrease in FMV, but it must be shown that:
• The repairs were necessary to restore the property to its condition immediately before the casualty event.
• The costs incurred for the repairs are not “excessive.”
• For instance, if general contractor markups on total costs in an area average 20% on disaster repair projects, a general contractor markup of 30% on a disaster repair project may be treated as excessive to the extent of the extra markup.
• The repairs don’t care for more than the damage suffered.
• For example, if an asphalt driveway was destroyed in a flood, repairing the driveway by regrading and repaving the driveway with similar quality asphalt would generally constitute a repair, the cost of which could be claimed as a casualty loss, b/c it doesn’t make the property “better off” than it was before the flood.
• However, if the repair included installation of a new drainage system that wasn’t part of the old driveway, the cost of the new drainage system may not be allowed because it would improve, versus just repair, the property (i.e, it would care for more than just the damage suffered).
• The value of the property after the repairs does not, as a result of the repairs, exceed the value of the property before the casualty event. This may require a “before and after” valuation of the property.
• There are safe-harbor methods that taxpayers may use to calculate a loss on personal-use residential real property or if the loss occurred because of a Federally-declared disaster.  These methods may be used in lieu of an appraisal.

For personal-use residential real property:

1. Insurance safe harbor method – the taxpayer may use the estimated loss determined in reports prepared by an insurance company setting forth the estimated loss the individual sustained as a result of the damage to or destruction of the property.

2. Estimated repair cost safe harbor method – the taxpayer may use the lesser of two repair estimates prepared by two separate and independent contractors, licensed or registered. The two repair estimates must include the itemized costs to restore the property.

• This method is only available for casualty losses of $20,000 or less.

3. De minimis safe harbor method – the taxpayer may estimate the cost of repairs required to restore the property. This method is only available for casualty losses of $5,000 or less.

• However, the costs of any improvements or additions that increase the value of the property above its pre-casualty value, such as the cost to elevate the personal residence to meet new construction requirements, must be excluded from the estimate for purposes of this safe harbor. An individual’s estimate must be a good-faith estimate, and the individual must maintain records detailing the methodology used for estimating the loss.

For Federally-declared disasters:

1. Contractor safe harbor method – the taxpayer may use the contract price for the repairs specified in a contract prepared by an independent contractor, licensed or registered, setting forth the itemized costs to restore the taxpayer’s property to the condition existing immediately before the federally declared disaster.

• However, the costs of any improvements or additions that increase the value of the property above its pre-disaster value, such as the cost to elevate the personal residence to meet new construction requirements, must be excluded from the contract price for purposes of this safe harbor.

• To use this method, the contract must be a binding contract signed by the taxpayer and the contractor.

2. Disaster loan appraisal safe harbor method – the taxpayer may use an appraisal prepared for the purpose of obtaining a loan of federal funds or a loan guarantee from the government setting forth the estimated loss that the taxpayer sustained as a result of the damage to or destruction of the taxpayer’s property from a federally declared disaster.

That the taxpayer was the owner of the property or contractually liable to the owner for damages; this can be demonstrated through title documentation, for instance.

The cost or other adjusted basis of the damaged property (prior to the casualty), evidenced by a purchase contract, checks, receipts, etc.

The depreciation allowed or allowable with respect to the property, if any.

That the property on which loss is claimed was the property that sustained the injury. This could be established through insurance adjuster’s reports, police or fire inspector reports, FEMA claim documentation, etc.

That the year in which the loss is claimed is the year in which the loss is deductible; i.e., that the damage occurred in the year for which the claim is being made. Note: There is an election on Form 4684, to deduct the loss in the tax year prior to the year the loss occurred. The election must be made within six months after the return due date for the disaster year.

That there is no claim for reimbursement with respect to which there is a reasonable prospect of recovery by the end of the year for which the loss is claimed.

Amount of insurance or other compensation received or recoverable, including cost of repairs, restoration, and clean-up.