If you file a homeowners insurance claim, but you don’t receive a sum that fully covers the cost of repairs or replacement, you might be able to take a casualty and theft loss deduction when you file your taxes. That’s only permissible in specific circumstances.
You Can Only Deduct a Loss Related to a Federal Disaster on Your Federal Tax Return
A deduction on your federal taxes is only allowed if the loss is related to an event that the president of the United States has declared a federal disaster, such as a storm, a flood, an earthquake, a fire, vandalism, or a terrorist attack. If your loss was caused by an event that wasn’t declared a federal disaster or occurred gradually over time, you won’t be allowed to claim a tax deduction.
You Might Be Eligible for a Deduction When You File Your State Taxes
Some states have changed the rules regarding casualty and theft loss deductions. Depending on where you live, you might be able to claim a deduction on your state tax return, even if the loss was related to an event that was not declared a federal disaster.
You’ll Only Be Able to Deduct Losses That Your Insurance Didn’t Cover
When you file a homeowners insurance claim, you might receive an amount that only covers a portion of what it will cost to repair your home or to replace personal belongings that were damaged or destroyed. If you’re eligible for a tax deduction, you’ll have to deduct the property’s salvage value or the amount that you have received or expect to receive as compensation from your insurance company.
Your property’s adjusted basis is your cost, plus or minus the cost of improvements or depreciation. The amount of a casualty loss will be either your property’s adjusted basis or the decrease in its fair market value, whichever is lesser. For a loss related to theft, the amount of your loss will be the property’s adjusted basis. The way that your deduction is calculated will also depend on whether you itemize deductions when you file your tax return.
Losses that your insurance company reimburses you for are considered gains. If the amount of compensation you receive is more than the property’s cost or adjusted basis, you will generally have a capital gain that you will have to include in your income when you file your taxes.
Consult an Accountant
The rules related to casualty and theft loss deductions are complex. An accountant can discuss your specific circumstances, answer any questions you may have, and help you file your taxes.
