Hurricane Helene has affected millions of people in multiple states across the southeastern portion of the country. It is just one of many weather-related disasters this year. Indeed, natural disasters have led to significant losses for many taxpayers, from hurricanes, tornadoes and other severe storms to the wildfires again raging in the West.

If your family or business has been affected by a natural disaster, you may qualify for a casualty loss deduction and federal tax relief.

Understanding the casualty loss deduction

A casualty loss can result from the damage, destruction or loss of property due to any sudden, unexpected or unusual event. Examples include floods, hurricanes, tornadoes, fires, earthquakes and volcanic eruptions. Normal wear and tear or progressive deterioration of property does not constitute a deductible casualty loss. For example, drought generally does not qualify.

The availability of the tax deduction for casualty losses varies depending on whether the losses relate to personal- or business-use items. Generally, you can deduct casualty losses related to your home, household items and personal vehicles if they are caused by a federally declared disaster. Under current law, that is defined as a disaster in an area that the U.S. president declares eligible for federal assistance. Casualty losses related to business or income-producing property (for example, rental property) can be deducted regardless of whether they occur in a federally declared disaster area.

Casualty losses are generally deductible in the year of the loss, which is usually the year of the casualty event. Courts, however, have allowed the deduction to be claimed in a later year in circumstances where the full extent of the loss is neither known nor ascertainable in the year of the casualty event. A second exception applies if your loss stems from a federally declared disaster, in which case you can opt to treat it as having occurred in the previous year. You may receive your refund more quickly if you amend the previous year’s return than if you wait until you file your return for the casualty year.

Factoring in reimbursements

If your casualty loss is covered by insurance, you must reduce the loss by the amount of any reimbursement or expected reimbursement. You also must reduce the loss by any salvage value.

Reimbursement also could lead to capital gains tax liability. When the amount you receive from insurance or other reimbursements (less any expense you incurred to obtain reimbursement, such as the cost of an appraisal) exceeds the cost or adjusted basis of the property, you have a capital gain. You will need to include that gain as income unless you are eligible to postpone reporting the gain.

You may be able to elect to postpone the reporting obligation if you purchase property that is similar or related in service or use to the destroyed property within the specified replacement period or buy a controlling interest (at least 80%) in a corporation owning such property or if you spend the reimbursement to restore the property.

Alternatively, you can offset casualty gains with casualty losses not attributable to a federally declared disaster. For taxable years beginning before January 1, 2026, this is the only way you can deduct personal-use property casualty losses incurred in locations not declared disaster areas.

Calculating casualty loss

For personal-use property, or business-use or income-producing property that is not completely destroyed, your casualty loss is the lesser of:

• The adjusted basis of the property immediately before the loss (generally, your original cost, plus improvements and less depreciation); or
• The drop in fair market value (FMV) of the property as a result of the casualty (that is, the difference between the FMV immediately before and immediately after the casualty).

For business-use or income-producing property that is completely destroyed, the amount of the loss is the adjusted basis less any salvage value and reimbursements.

If a single casualty involves more than one piece of property, you must figure each loss separately. You then combine these losses to determine the casualty loss.

An exception applies to personal-use real property, such as a home. The entire property (including improvements such as landscaping) is treated as one item. The loss is the smaller of the decline in FMV of the whole property and the entire property’s adjusted basis.

Other limits may apply to the amount of the loss you can deduct, too. For personal-use property, you must reduce each casualty loss by $100 (after you have subtracted any salvage value and reimbursement).

If you suffer more than one casualty loss during the tax year, you must reduce each loss by $100 and report each on a separate IRS form. Except for married taxpayers filing a joint return, if two or more taxpayers jointly own property and sustain a loss to that property from the same casualty, the $100 rule applies separately to each taxpayer.

However, that is not all. For personal-use property, you also must reduce your total casualty losses by 10% of your adjusted gross income after you have applied the $100 rule. As a result, smaller personal-use casualty losses often provide little or no tax benefit.

Keeping necessary records

Documentation is critical to claim a casualty loss deduction. You will need to show:

• That you were the owner of the property, or, if you leased it, that you were contractually liable to the owner for the damage,
• The type of casualty and when it occurred,
• That the loss was a direct result of the casualty; and
• Whether a claim for reimbursement with a reasonable expectation of recovery exists.

You also must be able to establish your adjusted basis, reimbursements and, for personal-use property, pre- and post-casualty FMVs.

Qualifying for IRS relief

This year, the IRS has granted tax relief to taxpayers affected by numerous natural disasters. For example, Hurricane Helene relief was recently granted to the entire states of Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia. The relief typically postpones filing and other deadlines. (For detailed information about your state, visit: https://bit.ly/3nzF2ui.)

Be aware that you can be an affected taxpayer even if you do not live in a federally declared disaster area. You are considered affected if records you need to meet a filing or payment deadline postponed during the applicable relief period are located in a covered disaster area. For example, if you do not live in a disaster area but your tax preparer does, you may qualify for filing and payment relief.

Turning to us for help

If you have had the misfortune of incurring casualty losses due to a natural disaster, contact us. We would be pleased to help you take advantage of all available tax benefits and relief.

For more information, contact Michael Loesevitz at [email protected] or 312.670.7444 or your ORBA advisor.