Reporting a Casualty Loss

If you have a loss to personal-use property, you must fill out Section A of Form 4684, Casualties and Thefts. Each item is reported in a separate column on this form (if a large number of items were lost or damaged, you can use reasonable categories such as "clothing," "jewelry," "furniture" etc.

Separate copies of Form 4684 must be used if you suffered more than one casualty during the year; transfer the amounts from Line 12 of all the forms you used to Line 13 on one of the forms and use that as the "master" for the remainder of the questions. Ultimately, you will transfer the loss amount to Schedule A as an itemized casualty loss deduction.

If you have a taxable gain as a result of a casualty to personal-use property, use Section A of Form 4684, and transfer the gain amount to Schedule D, Capital Gains and Losses, on your individual income tax return (Form 1040). The gain will be treated as short-term or long-term, depending on whether you held the property for one year or less, or for more than one year. If you elect to defer gain by purchasing qualified replacement property, you won't have to transfer the gain to Schedule D, but you must attach a statement to your tax return explaining the date and details of the casualty or theft, the amount of insurance, how you figured the gain, and that you are choosing to postpone gain by purchasing replacement property.

If you've already done the replacing, include information about the property, the postponed gain, the basis adjustment that reflects the postponed gain, and any remaining (unpostponed gain) you are reporting on Schedule D. If you make the replacement in a later year, attach a statement including this information about the replacement property to the tax return for that later year. If you expected to replace property but then didn't, or replaced at less than the full amount, you'll have to go back and amend your tax return for the year you claimed the loss.

Business or income property. If you had a loss to income-producing property, complete Section B of Form 4684, and transfer the loss to Schedule A as a miscellaneous itemized deduction.

If you had a gain to income-producing property, or if you had a gain or loss to trade or business property or rental or royalty property, complete Section B of Form 4684 and then transfer the gain or loss to Form 4797, Sales of Business Property. Again, you can elect to postpone tax on the gains by purchasing replacement property and attaching a statement to that effect to your tax return, as described above.

Business Tools

Among the Business Tools are Form 1040, Schedule A, Schedule D, Form 4684 and Form 4797. They are in Adobe Acrobat .pdf format, and you will need Acrobat Reader 4.0 to view the files and print them. A free version of Acrobat 4.0 is available in the Business Tools area as well.

Timing the deduction. Casualty losses must generally be deducted in the tax year in which the loss event occurred. However, if you suffered a loss in a presidentially declared federal disaster area, you may deduct your loss in the preceding year.

To do this, you must file an amended tax return for the preceding year, and figure the loss and the change in taxes exactly as if the loss actually occurred in that preceding year. If you did not itemize your deductions in that preceding year, you can go back and add any other itemized deductions (such as mortgage interest, taxes, charitable contributions etc.) that you would have been able to deduct in that year. You generally must make this choice by the due date (not including extensions) for the tax return of the year that the loss actually occurred.


Save Money

If your losses were very large, and exceed your income for the year, you may have a net operating loss (NOL) for the year. You can use an NOL to lower your taxes for a previous year, allowing you to get a tax refund for the earlier year.

You don't have to be in business to claim an NOL due to a casualty or theft loss, but the rules for claiming NOLs are fairly complex, and we recommend that you consult your tax advisor for advice on the mechanics of amending your prior year's return to claim this deduction.