Taxpayers are allowed deductions for casualty and theft losses. The deductions may be itemized deductions or, if related to a business, deductions for AGI. A casualtycasualtyDamage, destruction, or loss resulting from an identifiable event that is sudden, unexpected, or unusual. is a complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected, or unusual nature. Examples of casualties include property damage from storms, floods, shipwrecks, fires, automobile accidents, and vandalism. For damage from weather conditions to be deductible, the condition must be unusual for the particular region. To qualify as a casualty, an automobile accident must not be caused by the taxpayer’s willful act or willful negligence.

Many events do not qualify as casualties. For example, progressive deterioration from rust or corrosion and disease or insect damage are usually not “sudden” enough to qualify as casualties. The IRS has held that termite damage is not deductible as a casualty; however, several courts have in the past allowed the deduction. Indirect losses, such as losses in property value due to damage to neighboring property, also are not deductible.

If the taxpayer can establish that theft occurred, theft losses are deductible. It is important to show that the item was not misplaced. Theft losses are deductible in the year the theft is discovered, not in the year the theft took place—important in embezzlement, where the theft has gone on over many years and the statute of limitations has run out, otherwise preventing the taxpayer from amending returns for those years.

As a general rule, casualty losses are deductible in the year of occurrence, but there is an exception for disaster area losses. Taxpayers may elect to treat the losses as a deduction in the year prior to the year the casualty occurred. If a return has already been filed for the prior year, an amended return may be filed and a refund claimed for the prior year’s taxes paid. This provision is designed to provide taxpayers with cash on a timelier basis when they have suffered severe casualties.

The amount of the casualty or theft loss is measured by one of the following two rules:

Rule A applies to the partial destruction of business or investment property and the partial or complete destruction of personal property, while Rule B applies to the complete destruction of business and investment property. The cost of repairs is usually used for the measurement of loss from automobile damage. Repair costs also may be used to measure losses involving other types of property, but it is not controlling. Indirect costs, such as cleanup costs, are part of the loss provided the payments do not restore the property to better than its previous condition.

Tax law includes limitations on the deduction for casualty and theft losses related to personal property. All casualty and theft losses are first reduced by amounts of insurance proceeds. In addition, the amount of each personal casualty loss is reduced by $100 (the floor); the floor applies to each casualty or theft, not each year. In determining the casualty loss deduction, a taxpayer with three separate casualties occurring during the year must reduce each separate loss by the $100 amount; therefore, no deduction is allowed for a loss of $100 or less. In addition, taxpayers are allowed a deduction for personal casualty losses only to the extent the total losses for the year (less floor amounts) exceed 10% of the taxpayer’s AGI and then only if the taxpayer itemizes deductions.