Determining the decline of a property’s FMV due to a disaster can be the most complicated part of the casualtyloss equation. There are two main ways to determine by how much a disaster reduced your property’s FMV:appraisal or cost of repair. Several optional methods are available for each approach, subject to certain limitations.

An appraisal by a qualified appraiser is the gold standard for determining the decline in FMV due to a disaster.16Appraisals can be expensive. Unfortunately, the cost of an appraisal is not part of a casualty loss and is notdeductible as a miscellaneous itemized deduction from 2018 through 2025.

Instead of an appraisal, you can use the second option: the cost of repairing the property. But this is acceptableonly if17

the repairs are necessary to bring the property back to its condition before the casualty,

the amount spent for repairs is not excessive,

the repairs take care of the damage only, and

the value of the property after the repairs is not greater than before the casualty.

The general rule is to complete the repairs before claiming your casualty loss.18 But there are exceptions. You canchoose an optional safe-harbor method.

Optional Safe-Harbor Methods to Figure Decline in FMV

There are several optional safe-harbor methods to figure out the decline in FMV due to a casualty that occurred in2018 or later. If you use one of these, the IRS cannot question your valuation. You will likely find the optionalmethods handy for smaller losses.

If a casualty damages your home (not including a condo or mobile home), you may use the following optionalmethods:19

Estimated repair cost method. Use the lesser of two repair estimates prepared by licensedcontractors. This method is limited to casualty losses of up to $20,000. You use the estimate as yourclaim—you don’t have to complete the repairs first.

De minimis method. Here, you (yep, you) prepare a written good-faith estimate of the cost ofrepairs up to $5,000. You must keep documentation showing how you estimated the loss. You don’tneed to complete the repairs before you claim your loss.

Insurance method. You use the estimated loss amount in reports prepared by your homeowners’or flood insurance company.

Contractor safe harbor. You use the contract price for repairs prepared by a licensed contractor.You must enter into a binding contract with the contractor to perform the repairs—but you don’tneed to complete the repairs before you deduct your loss. This safe harbor is only for propertylocated in federal disaster areas.

Disaster loan appraisal. Use an appraisal prepared for you to obtain a loan from federal funds or afederal loan guarantee. This method is only for property located in federal disaster areas.

If personal belongings are damaged, you may use one of the following:20

De minimis method. Here, you make a good-faith estimate of the decrease in fair market value ofup to $5,000. You must keep records describing your personal belongings and your method forestimating your loss.

Replacement cost. With this method, you determine the cost to replace your belongings with newones, and then reduce that amount by 10 percent for each year you owned the belongings (up tonine years). If you use this method, you must use it for all of your personal belongings.