A casualty loss is a loss of property caused by fire, storm, shipwreck, or other casualty, or by theft (26 U.S. Code section 165(c)(3)). In federal tax it is one of only three kinds of loss an individual is allowed to deduct, and for personal property it is the one a further limitation usually removes.
Qualifying as a casualty is the easy part. What decides most real cases is a limitation sitting on top of it that removes the deduction entirely unless a President or, from 2026, a Governor has declared a disaster.
The Three Losses an Individual Can Deduct
For an individual, the deduction is limited to losses incurred in a trade or business, losses incurred in any transaction entered into for profit though not connected with a trade or business, and, except as provided in subsection (h), losses of property not connected with a trade or business or a transaction entered into for profit where those losses arise from fire, storm, shipwreck, or other casualty, or from theft (26 U.S. Code section 165(c)).
The third category is the personal casualty loss, and the words “except as provided in subsection (h)” are where it mostly disappears.
The Limitation That Decides Most Cases
For an individual, any personal casualty loss that would otherwise be deductible in a taxable year beginning after December 31, 2017 is allowed only to the extent it is attributable to a Federally declared disaster or a State declared disaster (26 U.S. Code section 165(h)(5)(A)).
Two things about that sentence are new, and both take effect for taxable years beginning after December 31, 2025 (26 U.S. Code section 165, Effective Date of 2025 Amendment note). The limitation used to carry an end date of January 1, 2026 and now carries none, so it is permanent rather than expiring. And a State declared disaster now counts alongside a federally declared one, which it did not before.
A State declared disaster means any natural catastrophe, including a hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm or drought, or, regardless of cause, any fire, flood or explosion, in any part of the State, which in the determination of the Governor of that State and the Secretary causes damage of sufficient severity and magnitude to warrant applying these rules (26 U.S. Code section 165(h)(5)(C)). The Governor alone is not enough. The Secretary has to agree.
For every year from 2018 through 2025, only the federal half was available. A house fire with no disaster declaration behind it produced no deduction in those years, unless the taxpayer had personal casualty gains to absorb it.
The Federal Half, as the Form Defines It
A federally declared disaster is a disaster determined by the President of the United States to warrant assistance by the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, and it includes either a major disaster declaration or an emergency declaration under that Act (IRS, Instructions for Form 4684, 2025).
The instructions then split the territory into three, and the differences are practical rather than cosmetic. A federal casualty loss is an individual’s casualty or theft loss of personal-use property attributable to a federally declared disaster, and the loss must occur in a state that received the declaration. A disaster loss is not limited to personal-use property and may be claimed for business or income-producing property and by corporations, S corporations and partnerships, and it carries an election to claim the loss in the preceding tax year. A qualified disaster loss carries the most: the deduction, the preceding-year election, and the ability to deduct the loss without itemizing other deductions on Schedule A (IRS, Instructions for Form 4684, 2025).
The Two Floors Underneath
A loss that survives the disaster test still has to clear two reductions, in order.
First, per event. A loss of an individual described in subsection (c)(3) is allowed only to the extent the loss from each casualty, or from each theft, exceeds $100 for taxable years beginning after December 31, 2009 (26 U.S. Code section 165(h)(1)).
Second, per year and against income. Where personal casualty losses for a year exceed personal casualty gains, the losses are allowed only to the extent of the personal casualty gains plus so much of the excess as exceeds 10 percent of the individual’s adjusted gross income (26 U.S. Code section 165(h)(2)(A)). The per-event $100 comes off first, because the amount of a personal casualty loss is determined after applying that paragraph (26 U.S. Code section 165(h)(3)(B)).
The figure being tested is adjusted gross income, so a client with a good income year absorbs a larger loss before anything is deductible.
The Exception Nobody Reads
There is one route to deducting a personal casualty loss with no disaster anywhere. Where a taxpayer has personal casualty gains for the year, the disaster limitation does not apply to the portion of the loss not attributable to a disaster, to the extent that portion does not exceed those gains (26 U.S. Code section 165(h)(5)(B)).
A personal casualty gain is a recognized gain from an involuntary conversion of personal-use property arising from fire, storm, shipwreck or other casualty, or from theft (26 U.S. Code section 165(h)(3)(A)). Insurance proceeds exceeding basis on one destroyed item are one way a gain appears, and it unlocks an otherwise dead loss on another item.
Business Property Is a Different Question
A loss on trade or business property, or on property held in a transaction entered into for profit, sits in the first two categories of subsection (c) and never meets the disaster limitation, which reaches only losses described in subsection (c)(3) (26 U.S. Code section 165(h)(5)(A)). No declaration is needed and no percentage floor applies.
One condition applies to both sides. Where property is covered by insurance and the loss is otherwise deductible, a timely insurance claim has to be filed, and where it is not, only the part of the loss that the policy does not cover is deductible (IRS, Instructions for Form 4684, 2025). Choosing not to claim in order to protect a premium gives up the insured portion of the deduction.
Common Questions
Damage, destruction or loss of property from fire, storm, shipwreck or other casualty, or from theft. For personal-use property the event also has to be attributable to a declared disaster, unless the taxpayer has personal casualty gains to absorb the loss.
Personal ones, only where the loss is attributable to a federally declared or a State declared disaster, with the state half available for the first time in taxable years beginning after December 31, 2025 (26 U.S. Code section 165(h)(5)). Business and profit-seeking property losses were never inside that limitation.
Only a qualified disaster loss can be deducted without itemizing other deductions on Schedule A (IRS, Instructions for Form 4684, 2025). An ordinary federal casualty loss is an itemized deduction, so it competes with the standard deduction.
On Form 4684, attached to the return, which is where gains and losses from casualties and thefts are reported (IRS, Instructions for Form 4684, 2025).
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can grade a real block of its own disaster-year return work through a trial task before anything client facing depends on it.
