8714 / What limitations apply to the amount a taxpayer is able to claim as a casualty or theft loss deduction?

Editor’s Note: Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.¹

Casualty and theft losses are deductible whether the loss relates to property held by the taxpayer (i) for use in a trade or business, (ii) for investment purposes or (iii) for use that is purely personal.² However, if the property involved is not held for a business or profit-generating purpose, the amount of the deduction is limited as follows:

(1)  each loss is reduced by $100 and any insurance proceeds received (prior to 2010, the $100 limitation was $500);³ and

(2)  the aggregate of such adjusted losses is deductible only to the extent that it exceeds 10 percent of adjusted gross income.⁴

If the taxpayer sustains more than one loss from a single casualty event, only one $100 reduction is made. Conversely, a separate reduction of $100 is made for losses from each casualty or theft event. The 10 percent limit applies to the total of all of the taxpayer’s losses from all casualty events occurring in the same tax year.⁵

When casualty and theft losses exceed income for the tax year, the excess is considered a net operating loss and may be carried back to offset income in prior years and carried forward to offset income of future years under the net operating loss provisions. All casualty and theft losses qualify even though the property is personal.

As discussed in Q 8713, the amount of the loss which can be deducted above the $100 floor is limited to the lesser of (1) the difference between the fair market value of the property immediately before the casualty and the fair market value immediately after the casualty, or (2) the adjusted basis of the property.⁶ (For a description of what the IRS considers to constitute “immediately after,” see Q 8713.) This amount is further reduced by any insurance or other indemnification received. In addition, as discussed above, such loss is deductible only to the extent it exceeds 10 percent of adjusted gross income.

Example 1: In June, Pete and Karen discovered their house had been burglarized. Their loss after insurance reimbursement was $2,000. Their adjusted gross income for the tax year was $29,500. To determine their theft loss deduction, Pete and Karen must first apply the $100 rule and then the 10 percent rule. Their theft loss deduction is calculated as follows:

1 Amount of loss............................................................................................................................... $2,000

2 Subtract $100.................................................................................................................................... (100)

3 Loss after $100 rule............................................................................................................................ 1,900

4 Subtract 10 percent of $29,500 (AGI)............................................................................................... (2,950)

Theft loss deduction................................................................................................................................ -0-

Pete and Karen will not be allowed a theft loss deduction because their loss ($1,900) is less than
10 percent of their AGI.

Example 2: Cathy and Bernardo owned a group of apartment buildings that were damaged by flooding. Before the flood, the adjusted basis in the apartment buildings was $672,000. The fair market value of the property immediately prior to the flood was $2 million, and immediately after the flood was $750,000. Cathy and Bernardo received $767,000 from insurance coverage. Although the $1,250,000 decline in market value far exceeded the insurance recovery, no casualty loss deduction is allowable, since the insurance proceeds exceeded the adjusted basis in the property.⁷