Business casualty losses vs. personal casualty losses
The Tax Cuts and Jobs Act of 2017 severely limited personal casualty loss deductions — suspending them for 2018–2025 except for federally declared disaster losses, and requiring the loss to exceed 10% of AGI plus a $100 floor. None of these restrictions apply to rental property.
A rental property is business property. Casualty losses on business property are reported on Form 4684, Section B (business property), not Section A (personal). Business casualty losses are deductible in full as ordinary losses, subject only to the normal passive activity and at-risk rules applicable to rental activities.
How to calculate the casualty loss
For a partial loss: the deductible amount is the lesser of (1) the decrease in fair market value caused by the casualty, or (2) your adjusted basis in the property — minus any insurance or other reimbursements received or reasonably expected. You cannot deduct more than your adjusted basis.
For a total loss (property destroyed or taken as worthless): the deductible loss equals your adjusted basis in the property minus insurance proceeds and salvage value.
You must reduce the deductible loss by insurance proceeds you reasonably expect to receive, even if you haven't collected yet. If you later receive less than expected, you can deduct the shortfall in the year the difference is certain. If you receive more, you may have a taxable gain.
Time of deductibility: the loss is deductible in the year the casualty occurred or, for theft losses, in the year the loss is discovered. If the amount of loss is uncertain because of pending insurance claims, the deduction may be delayed until the amount is reasonably determinable.
Passive activity interaction
A rental casualty loss flows through Schedule E as part of your rental activity and is subject to the passive activity rules. If you have net passive losses from the rental (including the casualty loss), the passive activity rules determine whether you can deduct them in the current year or must carry them forward.
Exceptions that allow current-year use: (1) the $25,000 rental loss allowance for actively participating landlords with AGI under $150,000; (2) real estate professional status; or (3) you have passive income from other sources to offset the loss. If the loss is suspended, it carries forward to future years and is released when you have passive income or dispose of the activity.
Frequently asked questions
Are rental property casualty losses deductible after TCJA?
Yes. TCJA's suspension of personal casualty losses does not apply to business property. Rental property casualty losses are fully deductible as business losses on Form 4684, Section B.
What if insurance covers the full loss?
If insurance fully reimburses you, you have no deductible loss. If insurance reimburses you for more than your adjusted basis, you may have a taxable gain.
Can a rental casualty loss offset my W-2 income?
Generally no, unless you qualify as a real estate professional or the $25,000 rental loss allowance applies. Otherwise, the loss is a passive loss that carries forward.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.