What Is a Casualty?

A casualty, for federal income tax purposes, is a sudden, unexpected, or unusual loss or damage to some property you own.

Examples of events that typically cause casualty losses are earthquakes, hurricanes, tornadoes, floods, storms, volcanic eruptions, shipwrecks, cave-ins, sonic booms, fires, car accidents, airplane crashes, riots, vandalism, burglaries, larcenies, or embezzlement.

Examples of events that are not considered deductible casualties are progressive deterioration caused by age, wind and weather, wood rot, termites or other insect infestation, or drought.

Tip There are situations where insect infestation can be considered a casualty for tax purposes, if the destruction was very sudden and severe. Also, drought can be considered a casualty if the property was used for a trade or business or in some other transaction entered into for profit, such as an investment in farmland.

Simply misplacing or losing property does not qualify as a tax-deductible casualty, even though your insurance company may consider it a reimbursable loss. However, if you lose property in conjunction with another accident, it may qualify.

For instance, if you were involved in a car accident that scattered your property into the surrounding area and some of your jewelry was never found, you can deduct the loss of the jewelry.

Work Smart Losses of business inventory can be treated as either a casualty loss, or as part of your cost of goods sold. Treating this kind of loss as part of your cost of goods sold will generally mean that you'll have less net income from your business, which, depending on your income level, may save you some Self-Employment Contributions Act (SECA) tax.