8716 / Can a casualty loss be spread over more than one tax year? What is the reasonable prospect of recovery doctrine?

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

Generally, a taxpayer is required to claim a casualty loss deduction for the tax year in which the loss was sustained. A taxpayer is considered to have sustained a casualty loss in the year in which the loss occurs as evidenced by closed and completed transactions and as fixed by identifiable events occurring in the year.²

The fact that a taxpayer is unable to determine the extent of the damage caused or the cost of repairing the damage is insufficient to allow the taxpayer to carry a casualty loss deduction into a succeeding tax year. The Tax Court has determined that an expert appraisal is sufficient to determine the level of damage sustained at the time the casualty loss occurred even if the extent of the damage was not immediately apparent.³