Deductions and Credits · Itemized deductions and QBI

Nonbusiness casualty and theft losses in declared disaster areas

Verification 2026 Verified
tax year · reviewed 2026-08-19 · Draft for I. Ohu review

Two things changed in 2025. A State declared disaster now qualifies as well as a Federally declared one, which widens the provision considerably. And the restriction itself — which had been due to lapse at the end of 2025, restoring the deduction for ordinary casualties — was made permanent. So a fire that destroys one house, with no declaration of any kind, produces no deduction, and will not begin to produce one in 2026 as scheduled.

The rule

The loss must be attributable to a declared disaster. For an individual, a personal casualty loss deductible in a taxable year beginning after 31 December 2017 is allowed only to the extent it is attributable to a Federally declared disaster or a State declared disaster (IRC § 165(h)(5)(A)). Pub. L. 119-21 § 70109(b)(1) inserted the State limb; § 70109(a)(2) changed the paragraph heading from “2018 through 2025” to “beginning after 2017”.

What a State declared disaster is. Any natural catastrophe — 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 the Governor (or the Mayor, for the District of Columbia) and the Secretary determine causes damage of sufficient severity and magnitude to warrant applying the section (IRC § 165(h)(5)(C)(i)). Note that it takes both determinations, not just the Governor’s.

Two floors, in order. First, a loss arising from each casualty or each theft is allowed only to the extent it exceeds a per-event floor (IRC § 165(h)(1)). Then, where personal casualty losses exceed personal casualty gains for the year, the losses are allowed only to the extent of the gains plus so much of the excess as exceeds 10 percent of adjusted gross income (§ 165(h)(2)(A)). The per-event floor is applied first: § 165(h)(3)(B) says the amount of a personal casualty loss is determined after the application of paragraph (1).

Where gains exceed losses, everything flips. If personal casualty gains for the year exceed personal casualty losses, all the gains are treated as from sales or exchanges of capital assets and all the losses are too (IRC § 165(h)(2)(B)). The 10 percent floor does not apply, and the losses are not itemized deductions at all.

And gains create a route for non-disaster losses. Where the taxpayer has personal casualty gains, the disaster requirement does not apply to the portion of a non-disaster loss up to the amount of those gains (IRC § 165(h)(5)(B)(i)) — and the gains so used are then removed from the § 165(h)(2)(A) computation for the disaster losses (clause (ii)). A taxpayer with an insurance recovery producing a gain can therefore deduct an ordinary, undeclared casualty against it.

Part of the deduction is above the line. Where § 165(h)(2)(A) applies, the deduction for personal casualty losses is treated as allowable in computing adjusted gross income to the extent the losses do not exceed the personal casualty gains for the year (IRC § 165(h)(4)(A)).

The loss may be pulled into the prior year. Notwithstanding the general rule, a loss occurring in a disaster area and attributable to a federally declared disaster may, at the taxpayer’s election, be taken into account for the taxable year immediately preceding the year in which the disaster occurred (IRC § 165(i)(1)). Note the limb: this election is expressed in terms of a federally declared disaster.

Current figures

Item	2026
The disaster requirement	a personal casualty loss is deductible only to the extent attributable to a Federally declared disaster or a State declared disaster — the State limb added by Pub. L. 119-21 § 70109(b)(1), and the restriction made permanent by the same section^TY2026
State declared disaster	any natural catastrophe — 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, which the Governor and the Secretary determine causes damage of sufficient severity and magnitude^TY2026
Per-event floor	$100 per casualty or per theft for taxable years beginning after 31 December 2009 — applied to each event separately before anything else^TY2026
Income floor	where personal casualty losses exceed personal casualty gains, the losses are allowed only to the extent of the gains plus so much of the excess as exceeds 10 percent of adjusted gross income^TY2026
Where gains exceed losses	where personal casualty gains exceed personal casualty losses, all the gains and all the losses are treated as from sales or exchanges of capital assets — so the 10 percent floor never applies^TY2026
Non-disaster losses against gains	where there are personal casualty gains, the disaster requirement does not apply to non-disaster losses up to the amount of those gains — and the gains so used are then removed from the § 165(h)(2)(A) computation for the disaster losses^TY2026
The above-the-line portion	personal casualty losses up to the amount of personal casualty gains are allowable in computing adjusted gross income rather than as an itemized deduction^TY2026
Prior year election	a loss occurring in a disaster area and attributable to a federally declared disaster may, at the taxpayer's election, be taken into account for the taxable year immediately preceding the year in which the disaster occurred^TY2026

How it works in practice

Measure the loss before applying anything. For property that is not completely destroyed, the loss is the lesser of the decline in fair market value or the adjusted basis, reduced by insurance and other compensation. For property completely destroyed and held for personal use, the adjusted basis is used without regard to the decline in value. Then subtract the per-event floor, then the income floor.

Ask about the declaration before doing any of that. Since 2018 a casualty with no declaration produces nothing, and the only route around it is personal casualty gains under § 165(h)(5)(B). From 2026 the question is wider — a State declaration will do — but it still needs the Secretary’s concurrence under § 165(h)(5)(C)(i), so a Governor’s declaration alone is not enough to rely on.

Consider the prior year election deliberately rather than by default. Section 165(i)(1) moves the loss to the preceding year, which can produce a refund quickly at a time the taxpayer needs cash, but it is measured against the preceding year’s adjusted gross income for the 10 percent floor — which may be higher or lower. Where the disaster year has low income, taking the loss in the disaster year may be worth more.

And watch for a gain. An insurance recovery exceeding basis is a personal casualty gain, which changes the whole shape of the computation: it can flip the losses into capital treatment under § 165(h)(2)(B), open the door to non-disaster losses under § 165(h)(5)(B), and move part of the deduction above the line under § 165(h)(4)(A). Section 1033 deferral may be available on the gain, which removes all of that.

Scenario 1 — the fire with no declaration

Elena’s garage burns down in 2026 through an electrical fault. Her uninsured loss is 38,000 dollars. No disaster of any kind is declared, and she has no casualty gains.

She deducts nothing. IRC § 165(h)(5)(A) allows a personal casualty loss only to the extent attributable to a Federally or State declared disaster, and Pub. L. 119-21 § 70109(a) removed the end date that would have restored the ordinary deduction for 2026. Had her State’s Governor and the Secretary made the determinations described in § 165(h)(5)(C)(i) for a wider fire event covering her property, the answer would be different.

Scenario 2 — the gain that unlocked the loss

Farid suffers two losses in 2026. A declared hurricane destroys a boat, and his insurance recovery exceeds his basis by 20,000 dollars, producing a personal casualty gain. Separately, an undeclared burst pipe destroys 15,000 dollars of contents.

The pipe loss is not attributable to any declared disaster, so § 165(h)(5)(A) would ordinarily disallow it entirely. But § 165(h)(5)(B)(i) disapplies that requirement to the extent of his personal casualty gains, so the whole 15,000 dollars comes through — reduced by the per-event floor. His gains then have to be reduced by that amount before the § 165(h)(2)(A) computation is run on any disaster losses, under clause (ii). The gain did more work for him than the declaration did.

Scenario 3 — the election that cost money

Gita’s home is destroyed in a federally declared disaster in March 2026. Her adjusted gross income was 190,000 dollars in 2025; in 2026, having stopped work to rebuild, it is 40,000 dollars. Her allowable loss before floors is 90,000 dollars.

Electing under IRC § 165(i)(1) to take the loss in 2025 gives her a refund quickly, but the 10 percent floor in § 165(h)(2)(A)(ii) is measured against 2025’s income — 19,000 dollars of the loss is absorbed. Taking it in 2026 absorbs only 4,000 dollars, leaving 15,000 dollars more deductible, though she waits for it and may have less tax to offset. The election is a cash-flow decision with a real price, and the price runs the opposite way from what “claim it sooner” suggests.

No declaration, no deduction — and that is now permanent. Pub. L. 119-21 § 70109(a) removed the scheduled 2026 restoration.

A State declaration needs two determinations, the Governor’s and the Secretary’s (§ 165(h)(5)(C)(i)).

The per-event floor comes first. Section 165(h)(3)(B) determines the loss after applying § 165(h)(1), so the income floor is applied to the already-reduced figure.

Where gains exceed losses the floors vanish and everything becomes capital under § 165(h)(2)(B).

How this has changed

The restriction became permanent and simultaneously wider. Pub. L. 119-21 § 70109(a)(1) struck the 2026 end date from § 165(h)(5)(A) and § 70109(a)(2) updated the heading; § 70109(b) then added the State declared disaster limb and the § 165(h)(5)(C) definition. Both changes point the same way for a taxpayer with a State declaration and opposite ways for one without: the deduction they were expecting to get back in 2026 is gone, but a State event that would never have qualified now may.

Note the asymmetry the amendment created. The deduction in § 165(h)(5)(A) now reaches Federal and State declared disasters, but the prior year election in § 165(i)(1) is still expressed in terms of a loss “attributable to a federally declared disaster”. On the face of the section, a State declared disaster supports the deduction but not the election. This is worth flagging rather than assuming was intended.

The 2018 change reversed a rule that had stood since 1964. Before it, any casualty or theft loss above the two floors was deductible; the disaster requirement did not exist. A great deal of published material still describes the general rule, and the two floors are often presented as the only limitations.

The per-event floor has been the same figure since 2010 and is not indexed — it was temporarily raised and then returned, and the statute still carries both numbers with the earlier one in parentheses.

Exam focus

Expect a declaration to be the whole question. No declaration, no deduction, and the 2026 restoration did not happen.

Expect the order of the floors — per event first, then 10 percent of adjusted gross income.

Expect personal casualty gains in the facts, which flip the treatment under § 165(h)(2)(B) or unlock non-disaster losses under § 165(h)(5)(B).

Expect the prior year election, and read whether the disaster is federally declared.

Check yourself

1. A taxpayer’s uninsured personal property is destroyed by a fire that is not the subject of any declaration. What is deductible?

Answer: Nothing, absent personal casualty gains. IRC § 165(h)(5)(A) allows a personal casualty loss only to the extent attributable to a Federally or State declared disaster, and the provision is now permanent.

2. In which order are the two floors applied?

Answer: The per-event floor in IRC § 165(h)(1) first — § 165(h)(3)(B) determines the amount of a personal casualty loss after applying that paragraph — and then the 10 percent of adjusted gross income floor in § 165(h)(2)(A)(ii).

3. A taxpayer has 30,000 dollars of personal casualty gains and 12,000 dollars of personal casualty losses in the same year. How are they treated?

Answer: All the gains and all the losses are treated as from sales or exchanges of capital assets under IRC § 165(h)(2)(B), so the 10 percent floor does not apply and the losses are not itemized deductions.

4. May a loss from a State declared disaster be claimed in the preceding year?

Answer: On the face of the statute, no. IRC § 165(i)(1) permits the election for a loss attributable to a federally declared disaster; the State limb added by Pub. L. 119-21 § 70109(b)(1) appears only in § 165(h)(5)(A).

5. What is required for a State declared disaster?

Answer: A determination by the Governor of the State, or the Mayor for the District of Columbia, and by the Secretary, that the event causes damage of sufficient severity and magnitude to warrant applying the section (IRC § 165(h)(5)(C)(i)).

Change log

2026-08-19Initial draft. Sets out the IRC § 165(h)(5)(A) disaster requirement as amended by Pub. L. 119-21 § 70109 to add State declared disasters and remove the end date, the § 165(h)(5)(C) definition of a State declared disaster, the § 165(h)(1) per-event floor and § 165(h)(2) 10 percent floor, the § 165(h)(2)(B) reversal where gains exceed losses, the § 165(h)(4)(A) above-the-line portion, and the § 165(i)(1) prior year election.