If a taxpayer had their personal property destroyed, they could claim casualty and theft losses. For one to qualify for this deduction, however, there must be a sudden and unplanned event. For the case to qualify as a theft loss, there must be proof that the taxpayer was robbed of the property and not lost or misplaced.
How Theft and Casualty Losses Work
There cannot be casualty and theft losses for one-off events, which are not a normal part of daily life. Also, one must not be engaged with the event when it happened, such as a vehicle accident. Examples of natural disasters that qualify are fires, floods, hurricanes, earthquakes, storms, etc. Taxpayers should note that while the loss might be continuous through a natural cause, one cannot claim a loss that occurred through time. A perfect example is the degradation of a machine via rust.
The 2017 TCJA altered the rule for claims from theft and casualty. As a result, valid claims are damages that come from events declared as a natural disaster.
Also, the only case in which one cannot deduct the loss is if there is an insurance cover. For instance, there was a storm declared as a federal disaster by POTUS. During the event, some branches broke on your house, and a section was destroyed. A contractor gave you an estimate that the repair cost will be around $5,500. You contacted your insurance company with the expectation that they will take care of the total assessment. However, the insurance firm paid only $2,500 and declared that they are not liable for the outstanding $3000. There is the provision to deduct the $3000 personal casualty loss from your federal tax using the new limitation as a casualty loss.
In a case, however, that the POTUS does not declare the storm that caused the event a disaster, one will not be able to claim the $3000 as a personal casualty loss.
Effect of TCJA on Theft and Casualty Losses
The IRS publication 547 revealed that theft and personal casualty losses of a taxpayer that occurred in a tax year that started after 2017 could only be deducted provided they are connected to a federally declared disaster.
The implication of this is that human activities like vandalism, theft, terrorist attacks that are not federally declared as a national disaster by POTUS are not covered.
Here are some events that can be deducted provided the loss happened when the event was declared a federal disaster
Vandalism
Sonic booms
Floods
Terrorist attacks
Shipwrecks
Mine cave-ins
Volcanic eruptions
Storms with tornadoes and hurricanes
It is important to note that it is only the property owner that can take the deduction. As a result, if a house is damaged during a federally declared disaster, only the landlord can claim the deduction and not the tenant. Although, there is a provision for the tenant to claim a deduction for rent payment as long as he files the deduction the year of the incidence.
Casualty and Theft Loss Gains
If the insurance company reimburses the losses, it cannot be claimed. Also, there is a possibility that Uncle Sam will tax reimbursed claims since they are classified as gains. The following example explains this.
Mr. and Mrs. Walter own a house, a golden watch, and an SUV in an environment affected by a storm. A tree fell on their home, destroying the car and a section of the roof in the process. The SUV was estimated to worth $25000, while the roof destroyed was valued at $10,000. A thief seized the opportunity to break into the SUV and steal the golden watch left in the car. The golden watch was valued at $3.500.
Luckily for Mr. and Mrs. Walter, they have insurance coverage on the SUV and the house, but not the golden watch. The insurance firm paid them the sum of $35,000 – the value of the claim submitted. This money can be taxed since it is classified as a theft and casualty gain. There is, however, a provision to offset the gain by the price of the stolen watch worth $3,500, which they can claim as federal taxes.
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