Major Updates to Casualty Loss Deductions Under the OBBBA: What Taxpayers Need to Know
Published on by Andre Williams in Tax Services
The One Big Beautiful Bill Act (OBBBA) has introduced significant updates to casualty loss deductions for individuals. Effective for tax years beginning after December 31, 2025, these changes expand what qualifies as deductible losses and make several temporary provisions permanent. Understanding these changes can help taxpayers prepare for the new rules on disaster-related tax relief.
State-declared disasters now qualify
In the past, individuals could only deduct personal casualty and theft losses if they were tied to a federally declared disaster. Starting in 2026, the OBBBA broadens this rule: losses from both federally and state-declared disasters are deductible.
A state-declared disaster is defined as a natural catastrophe (like a hurricane, tornado, storm, or earthquake) or any fire, flood, or explosion the state deems severe enough to qualify. This expansion means more taxpayers impacted by state-recognized disasters will now be eligible for relief.
Permanency of disaster-only limitation
The limitation that only losses from declared disasters are deductible is now permanent. While the Tax Cuts and Jobs Act (TCJA) had set this restriction to expire after 2025, the OBBBA extends it indefinitely and includes state-declared disasters. Moving forward, only losses from federally or state-declared disasters will be deductible for personal-use property.
Deduction limits: $100 and 10% AGI rules made permanent
The OBBBA also makes permanent two key limitations on casualty loss deductions: the $100 rule, and the 10% of AGI rule. Under the $100 rule, each casualty or theft event must be reduced by $100, applied once per event rather than per item. For instance, if a storm damages both your home and your car, the $100 reduction applies once to the total loss from that storm. If you experience multiple casualty or theft events in a single year, the $100 reduction applies separately to each event.
After this adjustment, the total of all deductible losses for the year must be further reduced by 10% of the taxpayer’s adjusted gross income (AGI). Only the portion of losses that exceeds this threshold is deductible. In addition, a casualty loss is limited to the lesser of the decrease in the property’s fair market value caused by the event or the taxpayer’s adjusted basis in the property, reduced by any insurance or other compensation received.
Expanded relief in specific circumstances
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the Disaster Tax Relief Act of 2023 introduced different rules for qualified disasters, including a $500 floor and no AGI limitation.
It’s important to note that a federally declared disaster isn’t automatically a qualified disaster. For example, Hurricane Ian was declared a federal disaster in September 2022, but it didn’t become a qualified disaster until December 2024 with the passage of the Disaster Tax Relief Act of 2023. The type of disaster makes a difference, since declared and qualified disasters follow different rules and limits.
Election to deduct in the preceding year
Taxpayers can still elect to deduct a disaster loss in the tax year immediately preceding the year the disaster occurred. Previously limited to federally declared disasters, this option now applies to state-declared disasters too. The election must be made within six months after the regular due date (excluding extensions) for filing the original return for the disaster year.
Final thoughts
The OBBBA’s changes to casualty loss deductions provide broader relief for taxpayers affected by disasters, especially those recognized at the state level. However, the deduction remains limited to losses from declared disasters, and the $100 and 10% AGI rules are now permanent.
If your business has been impacted by a disaster and you’re unsure how these changes could affect your taxes, our team is ready to guide you through the new rules. Contact us today to schedule a free consultation with one of our top tax pros. You might also be interested in exploring our full library of OBBBA insights to learn more about how the law impacts both individuals and businesses. As always, we’re here to help.
