8718 / What are the tax consequences to a taxpayer who has both personal (nonbusiness) casualty (or theft) gains and losses for the same tax year?

Editor’s Note: Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.¹ However, if a taxpayer has personal casualty gains, the new rules do not apply (even if the loss does not occur in a federal disaster area) so long as the losses do not exceed the gains. This essentially means that casualty losses will continue to offset casualty gains.²

If a taxpayer has both personal casualty (or theft) gains and losses for the tax year, the taxpayer is required to offset (net) those casualty losses with any casualty gains for the year.

If a taxpayer has casualty or theft gains as well as losses to personal-use property, the taxpayer must compare total gains to his or her total losses after he or she has reduced each loss by any reimbursements and by $100, but before reducing the losses by 10 percent of adjusted gross income.

If the taxpayer’s personal casualty losses for the year exceed personal casualty gains for the year, a deduction is allowable to the extent of the sum of the following:

(1)  The amount of personal casualty gains for the tax year; plus

(2)  So much of the excess as exceeds 10 percent of the taxpayer’s adjusted gross income for the tax year.³

If the taxpayer’s casualty gains for the tax year exceed casualty losses, the gain or loss is treated as though it resulted from the sale or exchange of capital assets (see Q 8604).⁴ As such, any gains will be taxed at the rates applicable to sales or exchanges of short-term or long-term capital assets, depending upon how long the taxpayer held the asset (see Q 8625).

If the taxpayer’s casualty losses for the tax year exceed casualty gains, all gains and losses are treated as ordinary gains or losses.

These rules apply to both casualty losses and theft losses.⁵