8719 / What special rules apply to taxpayers who suffer casualty losses within a federally-declared disaster area?

Editor’s Note: The 2017 tax reform legislation suspended the generally available deduction for casualty and theft losses for 2018-2025, with the exception of losses sustained in a federally declared disaster zone. See Q 8720 for a discussion of the special relief created for victims of qualified 2016 disasters.

Editor’s Note: On December 12, 2024, President Biden signed the Federal Disaster Tax Relief Act of 2023 into law.  The law provides relief for qualified disaster-related casualty losses.  To assist taxpayers in the wake of extreme weather events that occurred between January 1, 2020, and January 11, 2025, the law eliminates the rule that personal casualty losses must exceed 10% of the taxpayer's adjusted gross income before becoming deductible.  Under the law, each separate casualty loss can be deducted if the value exceeds a $500 floor.  Taxpayers can also claim these qualified disaster deductions above-the-line, meaning that they will not be required to itemize in order to take advantage of the deduction.  The law covers a range of disasters, including Hurricanes Milton and Helene, the wildfires in California and Hawaii, and Hurricane Ian, which hit in 2022.  The FEMA website contains a full list of disasters that qualify.

In recognition of the fact that taxpayers who sustain casualty losses as a result of disasters often have an immediate need for relief, the IRC contains provisions that accelerate the recognition of tax benefits to which disaster victims are entitled.

As such, disaster victims are entitled to claim casualty losses on their tax returns for the year before the disaster actually occurred.¹ This treatment is elective, so the taxpayer may choose to claim the casualty loss in the manner otherwise prescribed by IRC Section 165 (see Q 8716).

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Planning Point: An election to claim a deduction for the preceding year must be made by filing a return, an amended return, or a claim for refund clearly showing that the election has been made. In general, the return or claim should specify the date or dates of the disaster which gave rise to the loss, and the city, town, county, and state in which the property which was damaged or destroyed was located at the time of the disaster. An election for a loss resulting from a particular disaster occurring after December 31, 1971, must be made by the later of (1) the due date for filing the income tax return (without regard to any filing extensions) for the year in which the disaster actually occurred, or (2) the due date for filing the return (determined with regard to any filing extension) for the taxable year immediately preceding the year in which the disaster actually occurred. The election is irrevocable 90 days after the date on which it’s made.²

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If the due date (including extensions) for filing the taxpayer’s prior year tax return has not expired, the taxpayer can claim the deduction when the taxpayer files that return. If the due date has passed, the taxpayer can file an amended return to reflect the casualty loss deduction on the prior year’s tax return.³

The special treatment described in this question applies to taxpayers who have sustained a loss:

(1)  Arising from a disaster in an area where the President of the United States determines that assistance is warranted by the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (or a successor act);

(2)  Occurring after December 31, 1971;

(3)  That otherwise constitutes a loss allowable under IRC Section 165(a) and the regulations.⁴

A taxpayer is entitled to claim a loss under these provisions if the taxpayer’s residence is located in a federally declared disaster area that has been declared unsafe for use as a residence because of the disaster, and the taxpayer is ordered to demolish or relocate the residence within 120 days after the area is declared to be a disaster area.⁵