If you suffer damage to your home or personal property, you may be able to deduct the losses you incur on your federal income tax return.
1. Casualty loss.
If your home suffered damage during a natural disaster or another eligible event, such as a fire or vandalism, you might qualify to deduct some of the loss amount.
If the natural disaster is a federally-declared disaster, you can typically choose to deduct the loss in the tax year the disaster occurred or the year prior, through an amended return if necessary.
Here’s how to determine how much you can deduct.
- Calculate the adjusted basis of your property before the casualty — usually how much you paid for it with adjustments for improvements and depreciation — and the decrease in the fair market value of the home as a result of the damage. The amount of your loss will be the lesser of the two figures.
- Don’t include loss of future income or profits in your calculation.
- Subtract any insurance proceeds or other reimbursements you received or expect to receive for the loss from your total loss amount. For example, if your loss was $20,000 in damages to your house, and your homeowner’s insurance paid you $12,000, you must subtract the insurance payout, ending up with a loss of $8,000.
- If it’s personal-use property — as in, you’re not using it as an investment — reduce the loss amount after insurance and reimbursements by $100, and then reduce it by 10 percent of your adjusted gross income. For example, if your loss was $20,000 after insurance, reimbursements and less $100, and your AGI is $75,000, you will subtract 10 percent of your AGI ($7,500) to bring your loss amount to $12,500.
- You must itemize your deductions on your tax return, using Form 4684 and Schedule A, to include natural disaster deductions.
If the property was for business or investment purposes and was stolen or completely destroyed, your loss is your adjusted basis less any salvage value and insurance or other reimbursements.
Also, that business or income-producing property won’t be subject to the $100 and 10 percent reductions, but may be limited in other ways.