A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected or unusual. It does not include damage from events that are gradual, or damage from routine wear and tear (i.e. termite infestation, mold damage, etc.).
If the repairs meet certain conditions you may be able to use these costs as a measure of the decrease in fair market value of your property if all of the following are true:
- repairs are necessary to restore the property to the condition it was in immediately before the casualty
- amount of money spent for repairs is not excessive
- repairs only correct the damage caused by the casualty
- property value after repairs is not, as a result of the repairs, more than the value of the property immediately before the casualty
You cannot deduct the loss of future profits or income due to the casualty. For example, if the prices of homes in your neighborhood drop after a widespread flooding near your area, the decline in market value of your home is not a casualty loss.
A theft includes, but is not limited to, the taking of money or property by:
- kidnapping for ransom
The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Generally, you cannot deduct the loss of property that has been simply lost or mislaid. However, depending on the circumstances, accidental loss or disappearance of property resulting from a casualty could be deductible.
Ponzi schemes may be deductible as a theft loss in the year the leader of the Ponzi scheme is charged with the crime instead of waiting for the outcome of the trial. If you choose to deduct the loss before the trial is complete, you will be limited to no more than 95% of the loss as a deduction. See www.irs.gov for more information.
Expenses incurred for preventative measures against casualties and theft is not deductible as losses, such as:
- boarding up your house before a hurricane
- building a levee to prevent future flooding
- installing a security system after a break-in
Instead, you might be able to capitalize some of these expenses, if they are for permanent improvements, and add them to the basis of your property.
Incidental expenses you have as a result of a casualty or theft are not deductible and are not included in your total loss. Incidental expenses include the cost of:
- medical treatments for personal injuries, although you may be able to deduct the expenses as a medical deduction
- temporary housing or hotel fees
- renting a car
The IRS Disaster Resource Guide contains valuable information for those claiming casualty losses on property that was destroyed by a natural disaster, including: tax forms needed to claim a casualty loss, common questions, free tax services and instructions on how to identify which disaster losses to claim.
Disaster Resource Guide for Individuals and Businesses
For more information on Casualty, Disaster, and Theft Losses