A brief review of the rules for deducting Casualty losses.
You may be able to deduct a loss from a casualty or Theft on Schedule A.
A casualty is damage, destruction or loss of property that results from an identifiable sudden, unexpected or unusual event – such as a car accident, earthquake, fire, flood, hurricane, storm, tornado, and the like.
Your loss is the lessor of –
• the adjusted basis of the property before the casualty or theft, or
• the decrease in fair market value of the property as a result of the casualty or theft.
In the case of a theft there is generally no remaining fair market value, so your loss would be the adjusted basis of the property stolen.
When calculating the deductible loss you cannot use the market value of the property damaged - you must use the adjusted cost basis. The property may have been worth $500,000 before the casualty, but if the cost basis is only $200,000 your loss is limited to $200,000.
You first reduce the loss by any insurance or other reimbursement you receive, or expect to receive.
If your reimbursement is more than your allowable loss you may have taxable income. If you receive an unexpected reimbursement in a subsequent year, or if a reimbursement received after your return claiming the loss has been filed is not what you had expected when calculating the allowable deduction, you may need to make an adjustment on a subsequent Form 1040.
Next you reduce the resulting net amount by $100.00. This $100.00 reduction is per incident. If there is only one casualty or theft during the year the reduction is $100.00. If there are two separate incidents, one casualty and one theft, the total reduction is $200.00.
The total amount of all net casualty and theft losses for the year, after subtracting actual or anticipated reimbursements and the $100.00 per incident, is then reduced by 10% of your Adjusted Gross Income (AGI). The remaining amount is what can be deducted.
If the total amount of net casualty and theft losses for 2017 is $9,500.00 and your AGI is $105,000.00 you get no deduction ($9,500 - $10,500 = $0).
If you have a deductible casualty loss in a disaster area, such as Hurricane Harvey, you have the option of claiming the loss on the return for the year in which the casualty occurs – your 2017 Form 1040 - or the previous year. This means that you do not have to wait until next year to get the refund generated by the casualty loss – you can amend your 2016 Form 1040 and get a refund now, when you need the money to replace and repair.