How Landlords Can Deduct Casualty and Theft Losses on Taxes

Natural disasters and unforeseen events—such as floods, hurricanes, and fires—can cause significant damage to rental properties. While insurance provides some protection, landlords are not always fully covered or may not have any coverage at all. In such cases, the Internal Revenue Service (IRS) offers relief: uninsured casualty losses on rental properties may be tax deductible. Here's what landlords need to know about deducting these losses.

What Qualifies as a Casualty Loss?

A "casualty" is defined as damage, destruction, or loss of property resulting from a sudden, unexpected, or unusual event. Common causes of deductible casualty losses include:

• Natural disasters: earthquakes, floods, hurricanes, tornadoes, landslides, volcanic eruptions
• Man-made events: fires, vandalism (including tenant vandalism), terrorist attacks, sonic booms
• Government actions: demolition or relocation due to unsafe conditions

The key characteristic of a casualty is its suddenness. Gradual damage, such as wear and tear or deterioration from weather over time, does not qualify.

Importantly, casualty losses on rental properties do not require a presidential disaster declaration to be deductible. For example, damage caused by a localized apartment building fire is deductible, even if not federally declared.

Calculating a Casualty Loss Deduction

The amount you can deduct depends on whether the property was partially or completely destroyed and whether your landlord insurance coverage applies.

For Completely Destroyed Property

The deduction is calculated as follows:

Adjusted basis – Salvage value – Insurance proceeds = Deductible loss

• Adjusted cost basis: The original cost basis of the property plus improvements, minus depreciation or expensing claimed.
• Salvage value: The remaining value of the property after destruction, such as reusable materials or scrap.
• Insurance proceeds: Any reimbursement received or expected from an insurance claim.

For Partially Destroyed Property

The deductible loss is the lesser of:

1. The decrease in the property’s fair market value (FMV) due to the casualty, or
2. The property’s adjusted basis.

Both amounts must be reduced by salvage value and any insurance proceeds.

An appraisal may be required to determine FMV reductions. Alternatively, repair costs can be used as evidence of the decrease in FMV if they meet specific IRS criteria.

The Role of Insurance

Insurance proceeds reduce the deductible amount of the casualty loss. Unlike personal property losses, landlords are not required to file an insurance claim to qualify for a deduction. However, failing to file a claim may lead to financial considerations, such as higher premiums or policy cancellations.

If actual insurance reimbursements differ from the amount initially expected:

• Lower reimbursement: Claim the additional loss in the year the shortfall is determined.
• Higher reimbursement: Include the excess as income in the year received, to the extent the prior year's deduction provided a tax benefit.

Other Factors That Impact Casualty Loss Deductions

Landlords must account for any payments or services received that offset the loss, including:

• Repairs made or paid for by tenants
• Federal disaster loans forgiven
• Court awards (minus legal fees)
• Cleanup or repair services provided free of charge by organizations like the Red Cross

Special Rules for Federal Disaster Areas

If the casualty occurs in a federally declared disaster area, landlords may elect to deduct the loss on the prior year’s tax return. This can expedite financial recovery by allowing for a quick tax refund. Amended returns for the prior year must be filed within six months of the regular filing deadline for the disaster year.

Cleanup and Repair Costs

Costs associated with cleaning up or repairing damage caused by a casualty are not deductible as a casualty loss. Instead, these expenses may need to be capitalized and added to the property's adjusted basis.

Leveraging Software and Claiming Casualty Losses

Understanding and applying casualty loss deductions effectively can provide significant financial relief to landlords in the aftermath of a disaster. Consulting a tax professional or using a platform like Landlord Studio can simplify the process of documenting losses, calculating deductions, and maintaining accurate records.

Landlord Studio offers tools to help track expenses, organize documentation, and maximize deductions. A few ways Landlord Studio can help include:

Expense Tracking Made Easy

Casualty events often result in numerous expenses, such as cleanup, repairs, and insurance-related costs. Landlord Studio allows landlords to:

• Categorize and track expenses: Easily record repair and restoration costs or other outlays related to a casualty event.
• Upload receipts: Digitally store documentation for tax purposes, ensuring compliance with IRS requirements.

Learn more about Landlord Studio’s rental accounting tools →

Comprehensive Financial Reporting

Landlord Studio generates detailed financial reports that make it easy to:

• Monitor income and expenses before and after a casualty event.
• Provide accurate records to tax professionals or the IRS.
• Identify additional deductible expenses, such as depreciation or cleanup costs.

Learn more about Landlord Studio’s reporting tools →

Secure Document Storage

Accurate record-keeping is critical when claiming casualty losses. Landlord Studio allows landlords to upload and securely store essential documents, such as:

• Insurance policies and claim records
• Appraisals and receipts for repairs
• Property depreciation schedules

This centralization ensures landlords have all necessary documentation at their fingertips during tax season or in case of an audit.

Proactive Maintenance and Preparedness

While casualty losses are unpredictable, proactive property management can mitigate potential damage. Landlord Studio’s maintenance tracking features help landlords:

• Schedule and track routine inspections to identify risks before they escalate.
• Set reminders for necessary upgrades or safety improvements.

Learn more about Landlord Studio’s property maintenance tools →