Casualty losses on rentals: storms, fires and insurance

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: Casualty losses on rental property are business-type losses: no $100 floor, no 10%-of-AGI floor, and no federal disaster requirement. The loss is the smaller of the drop in value or adjusted basis (adjusted basis if totally destroyed), minus insurance. If insurance exceeds basis you have a gain, which section 1033 lets you defer by reinvesting. Federally declared disasters add a prior-year election and filing extensions.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof (eventually, over 27.5 years). When a storm takes the roof all at once, the timeline changes. The tax rules for damage to rental property are friendlier than the rules for your home, but they come with traps around insurance, basis and timing.

The main source is IRS Publication 547, Casualties, Disasters, and Thefts, with Form 4684 Section B for business and income-producing property. Rental property is income-producing property under section 165(c).

CPA Warning Label: Insurance often turns a "loss" into a gain because depreciation has shrunk your basis. Plan the replacement before you spend the check.

Business casualty rules

A casualty is damage from a sudden, unexpected or unusual event: storms, hurricanes, floods, fires, earthquakes, vandalism. Gradual deterioration, such as termites or a slow roof leak, is not a casualty; it is a repair or a replacement.

For personal-use property, since 2018 casualty losses are deductible only if caused by a federally declared disaster, and only after a $100 floor and a 10%-of-AGI floor. Those limits do not apply to rental property. Publication 547 explains that losses of property used in a business or held for income are not subject to them.

The amount of the loss, per Publication 547:

• Property totally destroyed: adjusted basis, minus insurance or other reimbursement and any salvage value.
• Property partly damaged: the smaller of the decrease in fair market value or the adjusted basis, minus reimbursement.
• Each separately identified business asset (the building, a detached garage, landscaping) is figured separately.

Adjusted basis means cost plus improvements minus depreciation taken (or allowable). A building you have owned for 15 years may have a much lower basis than its value, which limits the deductible loss.

The decrease in value is usually established with an appraisal. The cost of repairs can be evidence of the decrease if the repairs are necessary, only restore the pre-casualty condition, cost no more than needed, and do not increase value.

Is the loss passive?

Rental losses are generally passive. But under Reg. 1.469-2(d)(2)(xi), casualty losses are excluded from passive activity deductions when losses of that kind are not reasonably expected to recur regularly. That means a one-time storm loss can be deducted outside the passive loss limits; see rental losses and W-2 income. Confirm the treatment for your facts.

Insurance reimbursements

You must reduce the loss by any insurance you received or expect to receive. If you have a reasonable prospect of recovery, Publication 547 says you do not deduct that part of the loss until it is reasonably certain whether you will be reimbursed.

• You must file a claim. For property covered by insurance, you can deduct a loss only if you filed a timely insurance claim, per Publication 547.
• Reimbursement later differs. If you deduct a loss and later get more than expected, include the extra in income in the year received; do not amend. If you get less, deduct the difference in the year it is determined.
• Rent-loss coverage is ordinary rental income, not a reimbursement for the property.
• Gain. If insurance exceeds adjusted basis, you have a gain, even though you are worse off economically. The gain may be section 1231 gain, with depreciation recapture where it applies.

Repairs after the casualty

Repairs after a casualty interact with the casualty loss deduction. Under the tangible property regulations, if you deduct a casualty loss (or reduce basis for one), the costs of restoring the damage are a restoration that must be capitalized, up to the basis adjustment. You cannot both deduct the loss and expense the repair. Rev. Proc. 2018-08 provides safe harbor methods for figuring casualty losses of personal-use residences, not rentals.

Involuntary conversion 1033

When insurance or other compensation produces a gain, section 1033 lets you defer it if you buy replacement property that is similar or related in service or use.

• Replacement period: generally two years after the end of the first tax year in which any part of the gain is realized. For real property held for business or investment taken by condemnation, three years. The four-year period under section 1033(h)(1) is for a principal residence in a federally declared disaster area, not a rental; for business or investment property in a disaster area, section 1033(h)(2) keeps the normal period but lets any tangible business property count as similar to the property converted.
• Rental property test: for an owner-lessor, the IRS looks at whether the replacement has a similar relationship to you, for example another rental in place of a rental.
• Basis: replacement property basis is its cost minus the deferred gain. Deferral is not forgiveness.
• How much to reinvest: to defer all gain, the replacement must cost at least as much as the reimbursement. Any shortfall is taxable.
• Election: you elect by not reporting the gain and attaching a statement to your return with details. If you do not replace in time, you amend.

Rebuilding the same rental on the same lot counts as replacement, and so does buying a different rental in another city. Many landlords rebuild with the insurance money and defer the entire gain.

Disaster area extensions

Federally declared disasters bring extra options:

• Prior-year election. Under section 165(i), you can deduct a loss from a federally declared disaster on the return for the year before the disaster. This can produce a quicker refund. The election is generally due six months after the original due date of the return for the disaster year (without extensions).
• Filing and payment postponements. The IRS announces postponed deadlines for taxpayers in affected areas. Check the IRS disaster relief page for your county.
• Broader 1033 replacement property rules as noted above.

Qualified disaster losses for personal residences have their own rules; they do not change rental treatment.

Records to gather after the event

• photos and video of the damage, dated, plus pre-loss photos if you have them;
• the appraisal or contractor estimates;
• your depreciation schedule showing adjusted basis of each component;
• the insurance claim, adjuster report and settlement letters;
• receipts for cleanup, board-up and temporary repairs (cleanup costs are generally not part of the loss itself but may be deductible as rental expenses or part of the restoration);
• lease records showing lost rent, which is not deductible as a casualty loss but may be covered by rent-loss insurance that is taxable as rent.

Example

Illustration: Fran's rental house is damaged by a storm in a federally declared disaster area in May 2026. Assumptions: building cost $220,000, depreciation to date $64,000, adjusted basis $156,000. Value just before $310,000 (building portion), just after $250,000. Insurance pays $45,000 after a $5,000 deductible.

• Decrease in value: $310,000 minus $250,000 = $60,000.
• Smaller of decrease ($60,000) and adjusted basis ($156,000): $60,000.
• Minus insurance: $60,000 minus $45,000 = $15,000 casualty loss, reported on Form 4684 Section B.
• Basis after: $156,000 minus $45,000 insurance minus $15,000 loss = $96,000. Her $50,000 of repairs are capitalized as a restoration and added to basis, bringing it to $146,000, depreciated over 27.5 years.
• She could elect to claim the $15,000 on her 2025 return because it is a federally declared disaster.

Variation: the fire. Larry's rental is destroyed by fire. Adjusted basis $90,000, insurance $280,000. Gain: $190,000. If he rebuilds or buys another rental costing $280,000 or more within the replacement period, he defers the whole gain; the new property basis is $280,000 minus $190,000 = $90,000 (plus any extra spent). If he pockets the money, the $190,000 is taxable, with part treated as unrecaptured section 1250 gain taxed at up to 25%.