Individuals can deduct personal losses that aren’t reimbursed by insurance. Your loss is equal to the smaller of the damaged property’s adjusted tax basis[1] or decline in value, less any insurance proceeds you received or expect to receive.
If only it were that simple…
First, you must itemize your deductions. If after calculating your potential casualty loss your standard deduction is still higher than your itemized deductions, you will not benefit from the casualty loss.
Second, assuming you itemize, two offsets apply. First, your calculated loss is reduced by $100. Then the balance is deductible only to the extent it exceeds 10% of your adjusted gross income (AGI).
As an example, let’s assume Hurricane Helene caused $50,000 of damage to your home. Twenty years ago, you bought the home for $150,000 and before the hurricane hit, it was worth $500,000. You receive $20,000 of insurance proceeds. Fortunately, you itemize your deductions and your AGI is $150,000.
| Lesser of decrease in value or basis | $50,000 |
| Less: Insurance proceeds | (20,000) |
| Unreimbursed loss | 30,000 |
| $100 offset | (100) |
| 10% of AGI ($150,000) | (15,000) |
| Amount of loss deductible | $14,900 |
Assuming you are in the 24% tax bracket, that is a savings of ~ $3,500.
Some of you reading may notice that the amount of loss that is deductible is heavily dependent on your income. For someone making $300,000, that 10% AGI floor is now $30,000 and none of your loss is deductible.
Most of you probably notice that this is a lot of work to claim a partial loss from a natural disaster. In the past, Congress has tried to make it easier to claim disaster losses. In 2018, Congress removed the 10% AGI floor in response to the California wildfires. Earlier this year, a bill passed the House (but stalled in the Senate) that would remove the 10% AGI floor and add the casualty loss to a taxpayer’s standard deduction, in effect removing the need to itemize. Using the same example above, this turns a $14,900 tax deduction and $3,500 tax savings into a $29,900 tax deduction and a ~$7,200 savings regardless of your income. The recent events in Florida could nudge this bill into law, so stay on the lookout for things to come.
In the meantime, if you’re unsure whether this applies to you or not, we recommend to just save your receipts.
[1] For most homeowners, this will be your purchase price plus the cost of any improvements.
