If you’ve ever faced the financial and emotional blow of property damage, theft, or disaster, your first question after recovery might be: Can I claim this loss on my taxes?
Unfortunately, the answer is complicated and for most individuals, not as generous as it once was. The rules surrounding personal casualty and theft loss deductions are among the strictest in the Internal Revenue Code. Even after Congress passed the One Big Beautiful Bill Act (OBBBA), the restrictions remain tight, though there’s a small step forward beginning in 2026.
In this comprehensive guide, we’ll break down exactly what losses qualify, how the current rules work, and what’s changing in the near future. More importantly, we’ll discuss how to plan ahead to minimize the tax pain when disaster strikes.
What Are Casualty and Theft Losses?
A casualty loss occurs when your property is damaged, destroyed, or lost due to an unexpected event something sudden, unusual, or accidental. Common examples include:
- Fires
- Floods
- Earthquakes
- Hurricanes
- Tornadoes
- Car accidents
- Vandalism
A theft loss, on the other hand, results from someone illegally taking your property with the intent to deprive you of it for example, burglary, robbery, or embezzlement.
The IRS treats these losses differently depending on whether the property is personal (like your home or personal belongings) or business-related (like inventory or equipment used in your trade).
And this is where things get tricky because while businesses generally get full deductions, individual taxpayers face major limitations.
The Harsh Reality
Since the Tax Cuts and Jobs Act (TCJA) took effect in 2018, personal casualty and theft loss deductions have been drastically restricted.
Under the TCJA and continuing through 2025 you can deduct a personal casualty or theft loss only if it’s attributable to a federally declared disaster.
That means the President of the United States must formally declare the event severe enough to warrant federal assistance. Without that declaration, your loss is not deductible.
Even if your loss qualifies under that narrow rule, the IRS still imposes two significant reductions that can wipe out smaller claims:
- Subtract $100 from each casualty or theft event.
- Reduce the remaining amount by 10% of your adjusted gross income (AGI).
Only the leftover amount can be deducted as an itemized deduction on your return.
If you don’t itemize for example, if you claim the standard deduction, you get no benefit at all.
Let’s look at an example.
When the Numbers Don’t Work
Imagine you lost $25,000 in uninsured property damage from a federally declared hurricane. Your AGI for the year is $120,000.
Here’s how the math plays out:
- Start with your $25,000 loss.
- Subtract the $100 rule → $24,900.
- Subtract 10% of AGI ($12,000) → $12,900.
Your deductible casualty loss? $12,900.
If you take the standard deduction instead of itemizing, your deductible loss is $0.
This is why many taxpayers are shocked to learn that most casualty losses even those caused by natural disasters offer little to no tax relief.
OBBBA’s Small but Meaningful Update (Starting 2026)
The One Big Beautiful Bill Act (OBBBA) didn’t revolutionize this area of tax law, but it did add one modest win for taxpayers starting in 2026.
Under the new rule, you’ll no longer be limited to federally declared disasters. You’ll also be able to deduct losses from state-declared disasters events that your state’s governor formally recognizes as severe enough to qualify for state-level disaster relief.
This expansion means that more taxpayers who suffer from region-specific disasters like wildfires, severe storms, or localized flooding may finally get some tax relief without waiting for federal intervention.
However, keep in mind:
- The same $100 and 10% AGI reductions still apply.
- The deduction is still limited to itemizers.
- And the rule doesn’t apply until tax year 2026.
The Federal vs. State Declaration Difference
Here’s a closer look at the difference between federal and state disaster declarations — and why OBBBA’s change matters.
| Type of Declaration | Who Issues It | Federal Aid Eligibility | Deduction Allowed |
| Federal Disaster | The President (via FEMA) | Yes | 2018–2025 |
| State Disaster | Governor | Maybe (depends on FEMA approval) | 2026 and beyond |
This change recognizes that not every serious disaster gets federal recognition. Some events like regional tornadoes, local wildfires, or small-scale flooding may still devastate communities but never receive a federal declaration.
Under the new OBBBA provision, taxpayers in those areas finally have a chance to deduct their losses, even if Washington doesn’t get involved.
The Overlooked Exception
There’s one interesting twist in this complex area: casualty gains.
If your insurance proceeds exceed the tax basis of your damaged or destroyed property, you actually have a gain. That might sound strange but it happens more often than you’d think.
For example, suppose your home had a tax basis of $200,000 and was destroyed by a fire. You receive $250,000 from your insurance company. That $50,000 excess is a casualty gain.
Here’s the silver lining: if you have both casualty gains and casualty losses during the same year, you may offset those amounts even if the events weren’t federally or state-declared disasters.
This rule provides a small but valuable planning opportunity for taxpayers who experience multiple losses and insurance settlements in the same period.
Claiming Losses in the Prior Year
Another often-overlooked rule allows you to claim a loss from a federally declared disaster in the year before the loss occurred.
For example, if your home was destroyed in a 2025 federally declared disaster, you could choose to claim the deduction on your 2024 tax return instead.
Why would you do that? Two possible reasons:
- You could receive your refund sooner, providing faster financial relief.
- If your 2024 income was lower, the deduction might produce a larger tax benefit (since 10% of a smaller AGI is a smaller reduction).
However, note that this special timing rule does not apply to state-declared disasters under OBBBA. It’s limited to federal ones.
If you operate a small business, you’ll be happy to know that business casualty and theft losses are treated far more generously.
Unlike personal losses, business-related property damage or theft is fully deductible and there’s:
- No $100 reduction,
- No 10% of AGI rule, and
- No disaster declaration requirement.
Whether your loss was caused by a break-in, a storm, or an accident, as long as the property was used in your trade or business, the IRS allows you to deduct the entire unreimbursed loss.
This includes:
- Office equipment or inventory destroyed by a fire
- Theft of business tools or supplies
- Vehicle damage in a business-related accident
- Property loss during transit or shipping
For many self-employed individuals, this distinction makes it worthwhile to properly classify and document property used in business. Even if you work from home, designating certain assets as business property can make a big difference when disaster strikes.
Protecting Your Deduction Potential
While no one wants to plan for a disaster, smart tax planning can protect you when the unexpected happens. Here are practical steps to take now:
- Document Everything
Keep receipts, appraisals, and photos of valuable property. If a loss occurs, detailed records are your best proof for insurance and tax purposes.
- Review Your Insurance Coverage
Ensure your homeowner’s, renter’s, or business insurance is up-to-date and includes sufficient coverage for theft, fire, and natural disasters. Remember: the IRS only allows deductions for uninsured losses.
- Keep Business and Personal Property Separate
Use different accounts and records for business vs. personal assets. This helps preserve your eligibility for business loss deductions without confusion.
- Maintain Emergency Records
Store digital copies of key documents like deeds, titles, and insurance policies in cloud storage or a fireproof safe.
- Consult a Tax Professional After Any Major Loss
Casualty and theft losses are complex, and misreporting them can trigger IRS scrutiny. Working with a tax advisor ensures you claim every dollar you’re entitled to and avoid claiming something you shouldn’t.
The One Big Beautiful Bill Act didn’t revolutionize casualty and theft loss deductions, but it expanded them modestly to include state-declared disasters starting in 2026.
Until then, the rules remain strict and most personal losses remain nondeductible unless they stem from a federally declared event.
For small business owners and self-employed individuals, however, the path is clearer: business losses remain fully deductible. The key is documentation, classification, and professional guidance.
Navigating the IRS rules for casualty and theft losses can be overwhelming especially when you’re already dealing with the emotional and financial impact of a disaster.
At Basc Expertise, we help small business owners and individuals make sense of complex tax situations and recover every dollar they’re entitled to.
Book a consultation today to discuss your situation with a tax professional and create a plan that protects your finances before and after disaster strikes.