Tax Memo

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Topic Limitations on Casualty Losses Curated by John Buchanan, J.D., LL.M., Sr. Writer Analyst, Wolters Kluwer

For tax years 2018 through 2025, personal casualty and theft losses[1] may be deductible when:

• they are attributable to a federal disaster (see Disaster Losses); or • they do not exceed personal casualty gains (see Nonbusiness Casualty Gains).

For tax years before 2018 and after 2025, personal casualty and theft losses may be deductible even if they are not attributable to a federal disaster. See Nonbusiness Casualty and Theft Losses.

Regardless of the tax year, an individual taxpayer's nonbusiness casualty or theft loss generally is deductible only to the extent[2] that:

• the loss exceeds $100, and • the losses for the year exceed 10 percent of adjusted gross income (AGI).

$100 Floor

Each nonbusiness casualty and theft loss is generally deductible only to the extent that it exceeds $100[3] . The $100 floor applies separately to each casualty or theft. The $100 floor for each casualty is increased to $500 for a net disaster loss from certain federally declared disasters, as discussed at Disaster Losses.

Comment The $100 floor applies to personal casualty losses for tax years 2018 through 2025, as well as personal casualty losses for tax years before 2018 and after 2025.

Whether damage to property results from one casualty or from multiple casualties depends upon the facts of each case. Events closely related in origin usually give rise to a single casualty. For example, damage from a storm to a house and a car parked in its driveway is the result of a single casualty[4] , as is wind and flood damage caused by a hurricane. Similarly, when an owner’s residential properties in two different counties were damaged by the same storm[5] , only one $100 floor applied to the casualty loss deduction. If a single casualty causes losses in more than one year[6] , only a single $100 floor applies to the losses.

If losses to the same property can be traced to different events, however, there is more than one casualty. Therefore, the loss from each casualty must be reduced by the $100 floor. For example, when damage to a building was caused by separate acts[7] of vandalism, the damage caused by each act of vandalism was reduced by $100.

If a single casualty damages property that is owned by more than one taxpayer, the $100 floor applies separately to each taxpayer[8] . For example, if two brothers jointly own a house that is damaged by a storm, each brother must separately reduce his loss by the $100 floor.

$100 Casualty Loss Floor for Married Taxpayers

Married taxpayers who file a joint return are considered one taxpayer and are subject to only one $100 limit for each casualty or theft loss, regardless of whether the property was jointly or separately owned. However, if married taxpayers file separate returns[9] , each spouse is subject to the $100 limitation for each casualty.

If spouses file a joint return for the first year of a casualty that is sustained in two or more years, the taxpayers are treated as one individual for purposes of the $100 limit for all years in which the casualty is sustained, even if they file separate returns in subsequent years. If married taxpayers file jointly for the first loss year but separately in a later year, any unused portion of the $100 limitation is allocated equally between them in the later year.

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Limitations on Casualty Losses

If married taxpayers file separately in the first loss year, and the same casualty continues in a subsequent year, the taxpayers are treated as separate taxpayers[10] in the subsequent year in applying the $100 limitation. The unused part of the $100 limit from the first tax year is applied toward losses from the same casualty in subsequent years.

10% of AGI Limit

Nonbusiness casualty and theft losses are generally deductible only to the extent they exceed 10 percent of adjusted gross income[11] (AGI). The AGI floor is based on AGI for the year the deduction is taken, rather than the year of the loss. The 10-percent-of-AGI limit is waived for a net disaster loss from certain federally declared disasters, as discussed at Disaster Losses.

Example Ari’s house is damaged in September 2021 by a tropical storm that was declared a federally declared disaster. His loss after insurance reimbursement is $2,000. His AGI for the 2021 tax year is $29,500. Ari does not have a deductible casualty loss because his loss ($1,900 after $100 floor) is less than 10 percent of his AGI ($2,950).

Comment For nonbusiness casualty loss deduction before 2018 and after 2025, deductible personal casualty losses must exceed the sum of (1) the excess of personal casualty gains (as discussed at Nonbusiness Casualty Gains) over personal casualty losses, plus (2) 10 percent of AGI. For tax

years from 2018 through 2025[12] , nonbusiness casualty losses that exceed casualty gains are not deductible unless attributable to a federally declared disaster.

In applying the 10 percent limit, married taxpayers filing a joint return[13] are treated as one taxpayer. It does not matter if the spouses own the property jointly or separately. If married taxpayers file separate returns, then the 10 percent limit applies to each return. Similarly, if two or more individuals (other than spouses filing a joint return) have a loss on property that is owned jointly, the 10 percent rule applies separately to each. An estate or trust[14] computes its AGI in the same manner as an individual, except that it may deduct costs paid or incurred in connection with the estate or trust administration in determining AGI. See Casualty and Theft Losses of Estates and Trusts.

If the taxpayer has more than one casualty or theft loss during your tax year, each loss is first reduced by $100 floor and any reimbursement. The taxpayer’s casualty loss deduction is then reduced by 10 percent of AGI.

Example Betty’s car is destroyed in a floor in March 2021 that was declared a federally declared disaster. She did not have any car insurance and her loss on the car is $1,800. In November 2021, Betty’s basement in damaged by another flood that was also a federally declared disaster. The flood destroyed furniture, a washer and dryer, and other items. Her loss of the basement items was $2,100 after reimbursement from her home insurance.

Betty’s AGI for the year is $25,000. Her loss from the car after the $100 floor is $1,700 and her loss from basement after the $100 floor is $2,000. Thus, her total casualty loss for the year is $3,700. Her deductible loss is limited to $1,200, the excess of the loss $3,700 over 10 percent of her AGI ($2,500).

Citations

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Limitations on Casualty Losses

1. §165(c)(3) 2. §165(h) 3. §165(h)(1) 4. §1.165-7(b)(4)(ii) 5. DEC36369(M) 6. §1.165-7(b)(4)(ii) 7. DEC38388(M) 8. §1.165-7(b)(4)(iii) 9. §1.165-7(b)(4)(iii) 10. §1.165-7(b)(4)(iii) 11. §165(h) 12. §165(h)(5) 13. §165(h)(4)(B) 14. §165(h)(4)(C)

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