Who Might Help You Recover from Homeowners’ Losses? (Hint: It’s not FEMA)

Who Might Help You Recover from Homeowners’ Losses? (Hint: It’s not FEMA)

February 05, 2024

A never-ending series of floods destroys everything in your basement family room. A hurricane uproots a maple tree that crashes through your roof. Burglars invade your home and make off with your jewelry, laptops and flat-screen TV.

You call your insurance company to file a claim and then are shocked to discover that your homeowner’s insurance doesn’t cover damage caused by floods or hurricanes. Or that it won’t cover replacement costs for stolen items because you never properly documented them in your policy. Or you’ll only be partially reimbursed.  

Is there a silver lining here? Possibly. You may get relief from an unexpected source. No, not it’s FEMA. It’s the IRS.

Your losses may be tax-deductible

If your home is damaged or destroyed in an accident or by an act of nature (e.g., windstorm, lightning), and your homeowners' insurance does not completely reimburse you for the loss, you may be able to claim a casualty loss tax deduction on your federal income tax return. (A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.)

In addition, if your possessions are stolen, damaged, or destroyed, you may be able to claim a theft or casualty loss tax deduction if you're not fully reimbursed for your loss.

How to claim these deductions

 You must file federal Form 1040 and itemize your deductions on Schedule A to claim a casualty or theft loss deduction.

 For individual taxpayers, the casualty or theft deduction is subject to two limitations. 

  1. You can't deduct the first $100 of any loss.
  2. If your loss exceeds $100, you can only deduct casualty and theft losses if the total amount you lost in the year (minus the first $100 per casualty threshold) exceeds 10 percent of your adjusted gross income (AGI).

 However, casualty and theft losses are not subject to the overall limitation on itemized deductions based on your adjusted gross income.

What happens in the case of partial casualty loss reimbursements?

If you're partially reimbursed for your casualty loss by your insurer, you must subtract this reimbursement amount when calculating your loss for tax purposes. In other words, you do not have a casualty or theft loss to the extent you are reimbursed.

Also, keep in mind that if you do suffer a property loss and the property is covered by insurance, you should file a timely insurance claim. Otherwise, you may not be able to deduct your loss.

Calculating the amount of your loss

If you suffer a personal (as opposed to business) property loss, the amount of your loss is the smaller of: 

  1. The decrease in the fair market value (FMV) of the property as a result of the loss; or
  2. Your adjusted basis in the property before the loss.

Adjusted basis is usually your cost, increased or decreased by various events. After determining the smaller figure, you subtract any insurance reimbursements.

A hypothetical example

For example, assume a fire severely damaged your home. You had bought the house for $500,000 (adjusted basis) ten years ago, and it was appraised at $750,000 before the fire. It was worth only $150,000 after the fire. Your insurance company paid you $450,000 for the loss. Here's how you might calculate your deduction: 

  1. Adjusted basis in the property before the loss: $500,000.
  2. Decrease in property's FMV: $600,000 ($750,000 minus $150,000)
  3. Loss: $500,000 (smaller of 1 or 2, above).
  4. Subtract insurance reimbursement of $450,000.
  5. Amount of loss: $50,000.

Finally, you'd apply the two deduction limitations ($100 deductible; 10 percent of AGI) to determine the amount of your casualty loss deduction.

In general, you'll use IRS Form 4684 to figure the amount of your deduction; consult a tax professional if you need help. IRS Publication 584 can also provide you with additional information.

How do deductibles affect deductions?

With most homeowners’ insurance policies, you must pay a deductible before the insurer will reimburse you (partially or fully) for your loss. So, if you have a policy with a $500 deductible and you suffer a theft loss, you'll have to cover the first $500 of your loss out of pocket.

It's possible that you'll be able to write off this deductible as a theft loss on your federal tax return (subject to the $100 and 10 percent AGI rules).

If you do want to take advantage of these homeowners’ insurance-related tax deductions, it’s best to work with a tax professional to figure out exactly what you can and can’t deduct.


This material has been provided for general informational purposes only and does not constitute either tax advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax professional.




David Jaeger is a financial advisor at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or djaeger@canbyfinancial.com.


Prepared by Broadridge Investor Communication Solutions, Inc. and Canby Financial Advisors. Copyright 2024. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances.