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Deductions

Casualty and Theft Losses

Casualty and theft losses are the unexpected loss of property. Casualty and theft losses are deductible as an itemized deduction.

A casualty occurs when your property is damaged as the result of an identifiable event that is sudden, unexpected, and unusual.

  • A sudden event is swift, not gradual or progressive.
  • An unexpected event is unanticipated and unintended.
  • An unusual event is not a normal day-to-day occurrence and is not typical of the types of activities in which you engage.

A theft occurs when property is taken or removed with the intent to deprive you of it.  A theft is not mislaid or lost property.

Insurance Coverage

If the property is covered by insurance, you must file a claim for reimbursement of the loss.

If the property is covered and you do not file a claim, you cannot deduct a casualty or theft loss for the property. The portion of the property not covered by insurance is eligible to be claimed for a deduction.

The amount of insurance deductible you must pay to receive reimbursement is part of the total casualty or theft loss.

Amount of Loss

To determine the amount of loss, you must know the fair market value (FMV) of the property before and after the loss and your adjusted basis in the property. Fair market value can be determined by the amount for which you could sell the property in its present condition. Adjusted basis is usually what the item cost, increased or decreased by events such as improvements, deterioration, or depreciation.

The amount of the loss is the lesser of the decrease in FMV as the result of the casualty or your adjusted basis in the property before the casualty or theft.

You must reduce the amount of loss by any reimbursement you receive, or expect to receive. Reimbursements include insurance recovery.

Once the amount of loss is determined, the loss must be further reduced by $100 if the property is personal. The $100 reduction for personal property applies to each casualty or theft during the year, regardless of how many items are involved in each incident.

After the $100 reduction, you must further reduce the amount of loss by 10% of your adjusted gross income (AGI). The balance remaining after these two reductions is the deductible amount of your loss.

For more information, please refer to IRS Topic 515 - Casualty, Disaster, and Theft Losses.

Victims of Ponzi Schemes

Beginning in 2009, the IRS allows a theft loss deduction and a net operating loss carryback for losses from Ponzi investment schemes. The special tax treatment must be claimed on Form 4684, and is available only to qualified direct investors in a fraudulent scheme.

The deduction amount is equal up to 95% of the taxpayer's lost investment, or 75% if the taxpayer is seeking recovery. The amount of the deduction is reduced by any withdrawals the taxpayer received from the investment, and by any recovered amounts.

For more information, see the Instructions for Form 4684.