Deducting Casualty Losses

Casualty losses can occur when there’s damage or destruction of your property caused by a sudden or unexpected event or natural disaster, such as theft, tornado, fire, hurricane, flood, or earthquake. The good news in what’s normally a bad situation is that in most cases, these losses are deductible.

Individuals deduct the losses as an itemized deduction. If your property is insured, you can’t take a deduction unless you timely submit a claim to your insurance provider. Rules for calculating the loss can be tricky, and differ based on the type of property and extent of destruction. In general:

  • For personal-use property and for property not completely destroyed, your loss is limited to the lesser of your adjusted basis in the property on the date of the casualty or its decrease in value as a result of the casualty, less any insurance reimbursement received or expected to be received.
  • For completely destroyed business or income-producing property, including rental property, your casualty loss is equal to your adjusted basis in the property, less any insurance reimbursement received or expected to be received.
  • For personal-use property, in addition to the limitations above, the first $100 of each incident of casualty loss is not deductible. The remaining amount of casualty loss is further reduced by 10% of your adjusted gross income.

Taxpayers in Presidentially Declared Disaster Areas have a choice of tax years for deducting related disaster losses – either the tax year in which the disaster occurs, or the immediately preceding tax year.

Each choice has its pros and cons and will vary based on your particular situation, so it’s important to get some help before you decide. Claiming the disaster loss for the year before the loss occurred saves taxes immediately, without the need to wait until the year after the loss occurred. On the other hand, taking the deduction in the year of loss may save taxes if you’re in a higher bracket that year. Lots to consider!

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

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