If you’ve ever suffered damage or theft from an event like a flood, fire, or burglary, you may wonder if you can claim a tax deduction for your loss. Before the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, personal casualty losses were deductible as an itemized deduction. They were subject to a $100 deductible and a 10% AGI limitation. Beginning in 2018, the only personal casualty losses deductions were those associated with a federally declared disaster (such as the wildfires in Southern California in 2025).
Starting in 2026, the OBBBA allows itemized federal income tax deductions for personal
casualty losses resulting from state-declared disasters as well as from federally declared disasters. A “state-declared disaster” means any natural catastrophe (such as from a hurricane, tornado, storm, flood, fire, etc.) that the governor of the state determines to meet the criteria for such a declaration.
Unfortunately, the rules for personal casualty and theft loss deductions remain very restrictive, even after the recently enacted One Big Beautiful Bill Act (OBBBA). I will remind you that these restrictions do not apply to business casualty losses. For instance, a fire that caused damage to a rental house or apartment building and resulted in financial loss can be deducted in the year the damage occurred.
Current Rules (2018–2025)
Through 2025, you can deduct personal casualty or theft losses only if they stem from a federally declared disaster. This means the president must formally declare the event severe enough to warrant federal assistance. Even then, two key unfavorable reductions apply:
1. You must reduce the uninsured loss by $100.
2. Then you must reduce the remaining loss by 10 percent of your adjusted gross income (AGI).
Only what’s left can be claimed as an itemized deduction on your return. If you don’t itemize, you get nothing. These rules often wipe out smaller claims.
OBBBA’s Small Win
The OBBBA made the federally declared disaster requirement permanent but added one modest improvement. Starting in 2026, you can deduct losses from state-declared disasters—events recognized by your state’s governor as severe enough to qualify. While this doesn’t help today, it broadens relief beginning in 2026.
Other Important Points
If you have casualty gains (insurance proceeds exceeding the tax basis of damaged property), you may offset those gains with personal casualty losses, regardless of whether the event was federally or state-declared. For example, you had two personal casualty events in 2025. You were robbed of your uninsured Rolex watch, resulting in a $10,000 theft loss. In the same year, your expensive three-year-old yacht was destroyed by a freak storm surge. You had replacement-value insurance on the yacht; as a result of that coverage, you actually had a casualty gain of $30,000 (the excess of the insurance payment over your basis in the yacht).
You can offset $10,000 of that $30,000 gain with the $10,000 theft loss from the Rolex. The remaining $20,000 of gain from the RV ($30,000 − $10,000) will be reported as a taxable long-term gain.
Special timing rules allow you to claim losses from federally declared disasters in the year before the loss occurred, sometimes producing a better tax result. This rule, however, does not apply to state-declared disasters. For example, the Los Angeles County wildfires in January 2025 were declared a federal disaster. That declaration allows taxpayers to claim any fire-caused casualty loss on their 2024 tax returns, or in 2025 (the actual year of the loss).