If a federally declared disaster like a hurricane damages or destroys your home or other property, then you may be able to deduct those losses from your income taxes. Read below to understand whether this deduction could apply to you.
The Federal Tax Deduction for Disasters
Each year, major natural disasters — hurricanes, fires, flood, tornadoes — cost property owners billions of dollars in damage. Hurricane Ian, for instance, is alone expected to cost insureds over $63 billion. If a major disaster damages or destroys your home, business, or belongings, you may be able to file an insurance claim to recover your losses. But if your insurance or disaster aid doesn’t cover all of your losses, you may be left holding the bag, either because your damaged property is now worth less or because you paid out-of-pocket to repair your property. To lessen that hardship, the federal government created the casualty loss deduction, which allows you to deduct some of your disaster-related losses from your taxable income.
Eligibility for the Disaster Deduction
Like all tax breaks, the eligibility criteria for the disaster deduction (technically, the “casualty loss deduction”) are complex. Below are the primary requirements you should consider when deciding whether your losses may be eligible.
Personal-use losses must be caused by a federally declared disaster
Although the casualty loss deduction allows businesses to claim a deduction on certain non-disaster property losses, losses to personal-use property (think your residence and personal belongings) are eligible for a deduction only if:
- Your losses were caused by a federally declared disaster, and
- Your losses occurred in a state receiving a federal disaster declaration.
Not sure whether your damage was caused by a federally declared disaster? Fortunately, FEMA maintains an official database of all federally declared disasters. The state abbreviation at the end of the disaster declaration number indicates the state that received the disaster declaration. For a list of notable federally declared disaster in 2022, see the chart below:
|New York Severe Winter Storm and Snowstorm
|November 18, 2022 – November 21, 2022
|Florida Tropical Storm Nicole
|November 7, 2022 – November 30, 2022
|Florida Hurricane Ian
|September 23, 2022 – November 4, 2022
|North Carolina Hurricane Ian
|September 28, 2022 – October 4, 2022
|South Carolina Hurricane Ian
|September 25, 2022 – October 4, 2022
|Puerto Rico Hurricane Fiona
|September 17, 2022 – September 21, 2022
West Virginia Severe Storms, Flooding, Landslides, and Mudslides
|August 14, 2022 – August 15, 2022
|Illinois Severe Storm and Flooding
|July 25, 2022 – July 28, 2022
|Virginia Flooding and Mudslides
|July 13, 2022 – July 14, 2022
The deduction covers property loss, not additional living expenses
The casualty loss deduction is meant to compensate you for the loss in value to your property. Property includes all property you own, including homes, boats, cars, and personals belongings. But the deduction does not cover property you rent (although you might have a renter’s policy claim). And it doesn’t provide a break for other expenses you incur because of a natural disaster, such as travel and lodging expenses. Those additional living expenses may be reimbursable under your insurance policy, but they’re not eligible for a tax deduction.
You can’t claim reimbursed losses
This one shouldn’t be a surprise, but you can’t claim a deduction for property losses if your insurance company or anyone else reimburses you for those losses. You can only claim what is a net loss to you.
If your insurance company reimburses some but not all of your losses, you can claim a deduction on the unreimbursed portion of your losses. Even if your insurance company “fully” covers your losses, don’t forget about your deductible! By definition, losses to your property that are less than your deductible aren’t reimbursed by insurance and may be eligible for a tax deduction.
You do need to actually file an insurance claim if your losses covered by insurance. If you fail to file an insurance claim on property losses covered by insurance, you can only claim a deduction up to the amount of your deductible.
Just as general disaster expenses not tied to property loss aren’t eligible for a deduction, general disaster aid not tied to property loss doesn’t count against you as a reimbursement for your lost property. As an example, let’s say Hurricane Ian (which is a federally declared disaster) forced you to evacuate from your home and spend a month in a hotel. Your insurance company reimbursed some of the expenses you incurred during that month as additional living expenses (ALE), and FEMA gave you disaster aid for the travel and lodging expenses not covered by insurance. In this scenario, neither the ALE insurance payments nor the FEMA aid counts as reimbursement of your property losses.
Calculating the Disaster Deduction
In theory, calculating your disaster deduction is simple: It’s the amount by which a federally declared disaster decreases the fair market value of your property. In practice, calculating your disaster deduction is much more complicated, and you should consult IRS instructions and/or a tax professional before submitting your final deduction amount to the IRS.
Here’s the basic formula for determining the amount of your disaster deduction:
- Determine your adjusted basis in your property before the disaster.
- Determine how much the disaster decreased the fair market value of your property.
- Take the smaller amount of (1) and (2) (your FMV loss can’t be more than the adjusted basis value of your home), and subtract any insurance or other reimbursement you received or expect to receive.
Determining the decrease in the fair market value of your property
The IRS allows you to use several methods to calculate changes to the FMV of your property. Two of the most common methods are appraisal and the cost of repairs. In an appraisal, a competent professional determines the value of your property immediately before and after the hurricane, tornado, fire, or other disaster damaged the property.
The cost of repairing your property can also serve as a valid measure of the change in FMV to your property if all of the following conditions are met:
- The repairs are actually made.
- The repairs are necessary to bring the property back to its condition before the disaster.
- The amount spent for repairs isn’t excessive.
- The repairs take care of the damage only.
- The repairs do not increase the value of the property compared to the property’s value just before the disaster loss.
The Ten Percent Rule for personal-use property
If your damaged property is used for personal purposes rather than business purposes, then in most cases you can claim a disaster deduction only to the extent that your loss exceeds the sum of $100 plus 10% of your adjusted gross income (AGI). This formula is a little confusing, so here’s an example of how it works in practice. Let’s say your AGI is $50,000, and a tornado causes $20,000 of unreimbursed damage to your primary residence (which you use only for personal purposes). To calculate your disaster deduction, you would first figure out the amount that is 10% of your AGI. Here, your AGI is $50,000, so 10% of your AGI is $5,000. Now add $100 dollars to that amount, which makes $5,100. Under the Ten Percent Rule, you must subtract this $5,100 from your eligible disaster losses before you can apply for the disaster deduction. Here your disaster losses were $20,000, and when you subtract $5,100 from that amount you’re left with $14,900. So in this scenario, the amount that you could deduct from your taxable income is $14,900, not the full $20,000 that you sustained in disaster losses.
There is an important exception to the Ten Percent Rule that applies to qualified disaster losses. Qualified disasters are a special subset of federally declared disasters that Congress designates from time to time as being exempt from the Ten Percent Rule. Congress frequently revises the list of qualified disasters, but past examples include Hurricanes Harvey, Irma, and Maria and the 2017 California wildfires. If your property is damaged by a qualified disaster, then you do not need to subtract 10% of your AGI from your deduction. As an added bonus, you can apply deductions for qualified disaster losses to your standard deduction, instead of applying it to your itemized deduction as is normally required.
Time Period for Claiming the Disaster Deduction
There’s one additional point worth mentioning. Thanks to recent changes to the tax code, you can claim the disaster deduction for the tax year in which the disaster occurred or in the tax year preceding the year in which the disaster occurred. This rule allows you to take advantage of the disaster deduction sooner than you otherwise could. Note that it applies only if your property is located in a county or parish that’s eligible for public or private FEMA assistance under the disaster declaration (not just the state where the federally declared disaster occurred). For example, if a disaster damaged your home and belongings in January of 2022, you could have applied your disaster deduction to your 2021 tax return instead of needing to wait another year before filing your 2022 return.