This chapter explains the tax treatment of personal (not business or investment related) casualty losses, theft losses, and losses on deposits.
The chapter also explains the following topics.
How to figure the amount of your loss.
How to treat insurance and other reimbursements you receive.
The deduction limits.
When and how to report a casualty or theft.
Forms to file. When you have a casualty or theft, you have to file Form 4684. You will also have to file one or more of the following forms.
Schedule A (Form 1040), Itemized Deductions
Schedule D (Form 1040), Capital Gains and Losses
Condemnations. For information on condemnations of property, see Involuntary Conversions in chapter 1 of Publication 544, Sales and Other Disposition of Assets.
Workbook for casualties and thefts. Publication 584 is available to help you make a list of your stolen or damaged personal-use property and figure your loss. It includes schedules to help you figure the loss on your home, its contents, and your motor vehicles.
Business or investment-related losses. For information on a casualty or theft loss of business or income-producing property, see Publication 547, Casualties, Disasters, and Thefts.
Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses in Publication 547.
Mine cave-ins.
Shipwrecks.
Sonic booms.
Storms, including hurricanes and tornadoes.
Terrorist attacks.
Vandalism.
Volcanic eruptions.
Nondeductible losses. A casualty loss is not deductible if the damage or destruction is caused by the following.
Accidentally breaking articles such as glassware or china under normal conditions.
A family pet (explained below).
A fire if you willfully set it or pay someone else to set it.
A car accident if your willful negligence or willful act caused it. The same is true if the willful act or willful negligence of someone acting for you caused the accident.
Progressive deterioration (explained later).
Family pet. Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met.
Example. Your antique oriental rug was damaged by your new puppy before it was housebroken. Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss.
Progressive deterioration. Loss of property due to progressive deterioration is not deductible as a casualty loss. This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. The following are examples of damage due to progressive deterioration.
The steady weakening of a building due to normal wind and weather conditions.
The deterioration and damage to a water heater that bursts. However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty.
Most losses of property caused by droughts. To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit.
Termite or moth damage.
The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss.
Damage from corrosive drywall. Under a special procedure, you may be able to claim a casualty loss deduction for amounts you paid to repair damage to your home and household appliances that resulted from corrosive drywall. For details, see Publication 547.
A theft is the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the laws of the state where it occurred and it must have been done with criminal intent. You do not need to show a conviction for theft.
Theft includes the taking of money or property by the following means.
Blackmail.
Burglary.
Embezzlement.
Extortion.
Kidnapping for ransom.
Larceny.
Robbery.
The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.
Decline in market value of stock. You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. You report a capital loss on Schedule D (Form 1040). For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550.
Mislaid or lost property. The simple disappearance of money or property is not a theft. However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Sudden, unexpected, and unusual events are defined earlier.
Example. A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. The diamond falls from the ring and is never found. The loss of the diamond is a casualty.
Losses from Ponzi-type investment schemes. If you had a loss from a Ponzi-type investment scheme, see:
If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. Skip lines 19 to 27. Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. You do not need to complete Appendix A. For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684.
If you choose not to use the procedures in Revenue Procedure 2009-20, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate.
A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. If you incurred this type of loss, you can choose one of the following ways to deduct the loss.
As a casualty loss.
As an ordinary loss.
As a nonbusiness bad debt.
Casualty loss or ordinary loss. You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. The choice is generally made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. Once you make this choice, you cannot change it without permission from the Internal Revenue Service.
If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. Your loss is subject to the 2%-of-adjusted-gross-income limit. You cannot choose to claim an ordinary loss if any part of the deposit is federally insured.
Nonbusiness bad debt. If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year.
How to report. The kind of deduction you choose for your loss on deposits determines how you report your loss. If you choose:
Casualty loss — report it on Form 4684 first and then on Schedule A (Form 1040).
Ordinary loss — report it on Schedule A (Form 1040) as a miscellaneous itemized deduction.
Nonbusiness bad debt — report it on Form 8949 first and then on Schedule D (Form 1040).
More information. For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684 or Deposit in Insolvent or Bankrupt Financial Institution in Publication 550.
To deduct a casualty or theft loss, you must be able to prove that you had a casualty or theft. You also must be able to support the amount you take as a deduction.
Casualty loss proof. For a casualty loss, your records should show all the following.
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544 Sales and Other Dispositions of Assets
547 Casualties, Disasters, and Thefts
584 Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) 
Schedule A (Form 1040) Itemized Deductions
Schedule D (Form 1040) Capital Gains and Losses
4684 Casualties and Thefts