TCJA dramatically restricted the personal casualty and theft loss deduction. Before 2018, any sudden, unexpected loss from fire, storm, theft, or other casualty was potentially deductible. From 2018 through at least 2025, personal casualty losses are deductible only if they arise from a federally declared disaster under the Stafford Act. Business and income-producing property casualty losses are not subject to this restriction and remain fully deductible. This distinction - personal vs. business property - determines whether a loss is deductible at all.
Personal property (home, car, personal belongings): Deductible only if the loss is attributable to a federally declared disaster or a state-declared disaster (§165(h)(5)(A), (C)), subject to the personal casualty gain exception in §165(h)(5)(B). Subject to $100 floor per event and 10% of AGI floor for the net loss. Must itemize. Insurance proceeds reduce the deductible loss dollar for dollar.
Business or income-producing property: Deductible under §165(a) without the federal disaster restriction. Business property losses are not itemized deductions; losses on income-producing (nonbusiness) property are itemized on Schedule A (Form 1040), line 16. Not subject to the 10% AGI floor or $100 floor.
Theft: Same disaster restriction (federally declared or state-declared) applies for personal property. Business theft fully deductible in the year of discovery.
A federally declared disaster is a declaration by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. IRS.gov maintains a list of qualifying disaster declarations. Common qualifying events: hurricanes (Helene, Ian, Harvey), wildfires in California, flooding events with presidential declarations. Not qualifying: a tree falls on your car, your basement floods from a private pipe failure, your home is burglarized. The event must be attributable to a federally declared disaster (or a state-declared disaster under §165(h)(5)(C)).
For each casualty event: (1) Determine the lesser of adjusted basis or decrease in FMV. (2) Subtract any insurance reimbursement received or expected. (3) Apply the $100 floor per event. Sum all net casualty losses for the year, then apply the 10% of AGI floor - only the amount exceeding 10% of AGI is deductible. The remaining amount is an itemized deduction on Schedule A. If the taxpayer takes the standard deduction, the casualty deduction provides no benefit.
A casualty loss on property used in a trade or business is deductible under §165(a) and (c)(1) without any of the TCJA restrictions. The loss equals the adjusted basis of the destroyed property minus any insurance proceeds. For partially destroyed business property, the loss is the decrease in FMV up to adjusted basis minus insurance. Business casualty losses are computed on Form 4684, Section B, and generally carried to Form 4797 (line 14 for property held one year or less and for a net loss on property held more than one year; line 3 for a net gain on property held more than one year) or the partnership/corporate return. No federal disaster declaration required. No 10% AGI floor.