The One Big Beautiful Bill Act (OBBBA), signed into law in 2025, brings significant changes to the way individuals and businesses can claim deductions for casualty and theft losses on their tax returns. These updates are important for anyone who has suffered property damage, loss from disasters, or has been a victim of theft or scams.
Rudler is here to help you navigate these new rules and answer any questions you may have.
What Are Casualty and Theft Losses?
A casualty loss generally refers to damage, destruction, or loss of property resulting from a sudden, unexpected event like a fire, storm, flood, or accident. Theft loss, on the other hand, is the loss of property due to someone illegally taking it from you, such as through burglary, fraud, or scams. In both cases, the loss must not be covered by insurance or other reimbursements to be deductible.
Key Changes to Casualty Loss Deductions
Before the OBBBA, the tax law only allowed individuals to deduct personal casualty losses if they were caused by a federally declared disaster. This meant that if your home or belongings were damaged by a storm or fire that wasn’t declared a federal disaster, you generally couldn’t claim a deduction. There were also strict limits on how much you could deduct, including a $100 reduction per event and a requirement that your total losses exceed 10% of your adjusted gross income.
With the OBBBA, starting with tax years beginning after December 31, 2025, the rules have been expanded. Now, you can claim a casualty loss deduction if your loss is due to either a federally declared disaster or a state-declared disaster. This is a major change, as it recognizes that many significant disasters are declared at the state level and not by the federal government. The law also clarifies what counts as a state-declared disaster, including natural catastrophes like hurricanes, tornadoes, floods, and fires, as long as the state’s governor (or the mayor, in the case of Washington, D.C.) and the Secretary of the Treasury agree that the event is severe enough to warrant special tax treatment.
The deduction limits remain in place, so you still need to reduce each loss by $100 and your total losses must exceed 10% of your adjusted gross income. However, if you have personal casualty gains (for example, if your insurance payout exceeds your loss), you may be able to offset those gains with losses that aren’t from a disaster.
Theft Losses and Financial Scams
Theft losses are also subject to strict rules. To claim a deduction, you must show that a theft occurred under state law, determine the amount lost, and prove that there is no reasonable chance of getting your money or property back. The loss is generally claimed in the year you discover it, not necessarily the year the theft happened.
For most individuals, theft losses are only deductible if they are related to a profit-seeking activity, such as an investment, or if they are connected to a federally or state-declared disaster. Losses from personal thefts, like being scammed out of money in a romance scam or a fake kidnapping, are not deductible unless they meet these requirements. However, if you were tricked into investing in a fraudulent scheme with the expectation of making a profit, you may be able to claim a deduction, but you must be able to show that you had a profit motive and that recovery is unlikely.
The IRS has provided some guidance for victims of common scams, such as investment fraud or phishing, but the rules can be complex. For example, if you withdrew money from your retirement account because you were scammed, you still have to pay tax on the withdrawal, even if you never benefited from the money. There are some exceptions if you acted only as a conduit and did not receive any economic benefit, but these are limited and require careful documentation.
How to Claim a Casualty or Theft Loss
To claim a casualty or theft loss, you need to determine your adjusted basis in the property (usually what you paid for it), the decrease in fair market value due to the loss, and subtract any insurance or other reimbursements. You must also keep records to support your claim, such as appraisals, repair estimates, police reports, and correspondence with your insurance company.
If your loss is due to a disaster, you may have the option to claim the deduction on your tax return for the year before the disaster occurred, which can help you get a faster refund. There are also special rules for business and investment property, and for losses that are only partially covered by insurance or other recovery efforts.
What This Means for You
The changes under the OBBBA make it easier for many taxpayers to claim deductions for losses from state-declared disasters, but the rules for theft losses remain strict and can be difficult to navigate, especially for victims of scams. It’s important to keep detailed records and to consult with a tax professional to make sure you are taking advantage of all available deductions and complying with the law.
If you have suffered a loss due to a disaster or theft, or if you have questions about how these new rules apply to your situation, Rudler is here to help. We can guide you through the process, help you gather the necessary documentation, and ensure that your tax return is accurate and complete.
Important: These are all new changes, and further guidance from the IRS and Treasury Department is expected. The details may change as new regulations and clarifications are issued. Be sure to consult with your tax advisor to understand how these changes affect your specific situation.
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