Calculating the Decline in FMV for a Casualty Loss

The decline in fair market value (FMV) is what the property was worth immediately before the disaster minus what it was worth immediately after. You prove it with a competent appraisal or, if four conditions are met, the cost of repairs. Your loss is the smaller of that decline or your adjusted basis, minus insurance and other reimbursements.

The casualty loss formula

1. Decline in FMV: value just before the casualty minus value just after.
2. Adjusted basis: generally cost plus improvements, minus depreciation allowed or allowable.
3. Take the smaller of the two.
4. Subtract insurance and other reimbursements received or expected.

If personal-use property is insured, you must file a timely claim to deduct the part the policy would cover.

One exception: when business or income-producing property is completely destroyed and its FMV before the casualty was below its adjusted basis, the loss is the adjusted basis (minus salvage and reimbursements). Our guide to measuring casualty loss after the LA wildfires works an example.

Two ways to measure the decline

A competent appraisal

Treasury regulations call for a competent appraisal of the before and after values, leaving out any general drop in local market prices.

The appraisal fee is not part of the loss. For personal-use property, appraisal and photo costs are not deductible: miscellaneous itemized deductions were suspended starting in 2018, and the One Big Beautiful Bill Act (OBBBA) made that permanent for tax years beginning after December 31, 2025. For business property, ask your CPA.

The cost of repairs

Under Treas. Reg. §1.165-7(a)(2)(ii), repair cost can stand in for the decline in value if:

• the repairs are necessary to restore the property to its condition just before the casualty;
• the amount spent is not excessive;
• the repairs fix the damage and nothing more; and
• the repairs do not leave the property worth more than before.

IRS Publication 547 adds that the repairs must actually be made. Added square footage, upgrades and old defects do not count.

IRS safe harbors for your home

Rev. Proc. 2018-08 offers optional shortcuts for personal-use residential real property: a home you own. Homes partly used as a rental or home office, condos, co-ops and mobile homes are excluded. They do not apply to business or income-producing property.

• Estimated repair cost: the lesser of two itemized estimates from independent, licensed contractors, for losses of $20,000 or less.
• De minimis: a documented good-faith repair estimate, for losses of $5,000 or less.
• Insurance: the loss estimate in your homeowners or flood insurer’s report.
• Contractor: the price in a binding contract with an independent, licensed contractor (federally declared disasters only).
• Disaster loan appraisal: an appraisal prepared for a federal disaster loan (federally declared disasters only).

Separate safe harbors cover personal belongings. Rev. Proc. 2018-09, the cost-index method, covered only the 2017 hurricanes, so it does not apply to the 2025 fires.

Business property: equipment, yard and buildings

The $100 and 10% of AGI limits apply only to personal casualty losses, not to a construction company’s office, yard, trucks or equipment.

Business losses are figured one asset at a time, and basis often decides the result. If you wrote off a truck with Section 179 or 100% bonus depreciation, its adjusted basis may be zero: little or no loss, and insurance above basis is a gain. See our episode on equipment basis and depreciation recapture.

Personal loss limits and the 2025 law

For personal-use property, each casualty is normally reduced by $100 and the total by 10% of adjusted gross income (AGI). Since 2018, such losses count only if tied to a federally declared disaster.

The Los Angeles fires (FEMA DR-4856) were declared on January 8, 2025, with an incident period of January 7 to 31, 2025. That fits OBBBA’s window for qualified disaster losses (declared January 1, 2020, through September 2, 2025, with an incident period that began by July 4, 2025, and ended by August 3, 2025). For those, the $100 reduction becomes $500, the 10% of AGI cut does not apply, and you can claim the loss without itemizing.

For tax years beginning after December 31, 2025, OBBBA makes the disaster-only limit on personal casualty losses permanent and extends it to governor-declared state disasters. See our OBBBA casualty loss update.

Section 165(i) lets you claim a federally declared disaster loss on the prior year’s return. For a 2025 loss, calendar-year individuals had until October 15, 2026, so that window has closed for the January 2025 fires. The election does not cover state-only disasters.

How California differs

California generally follows the federal rules but also allows disaster losses where only the governor proclaimed a state of emergency, for tax years beginning on or after January 1, 2014, and before January 1, 2029. Los Angeles County had both declarations for the January 2025 fires.

FTB Publication 1034 tells individuals to subtract $100 and then 10% of federal AGI and does not mention the federal $500 rule, so your California figure may differ. California’s prior-year election for 2025 losses was due April 15, 2026, or by the extended due date. See our Palisades wildfire resources.

Records to keep

You must show what happened and when, that it directly caused the loss, that you owned the property, and whether you have a reimbursement claim. Keep closing statements, invoices and depreciation schedules; before and after photos; appraisals, estimates and repair invoices; and insurance claim files.

Frequently asked questions

What is the decline in fair market value for a casualty loss?

It is the property’s value just before the disaster minus its value just after. Your loss is the smaller of that decline or your adjusted basis, minus reimbursements.

Can I use repair costs instead of an appraisal?

Yes, if the repairs are necessary, not excessive, limited to the damage, and do not leave the property worth more than before. The repairs must actually be made.

Are appraisal fees part of my casualty loss?

No. For personal-use property they are not deductible, because the suspension of miscellaneous itemized deductions is now permanent.

Do the $100 and 10% of AGI limits apply to my construction company’s equipment?

No. Those limits apply only to personal casualty losses. Business property is figured one asset at a time.

Lost a home, a yard or both? Book a consult and we will work through the numbers with you.

Sources: Internal Revenue Code §§67, 165; Treas. Reg. §1.165-7; Rev. Proc. 2018-08; Rev. Proc. 2018-09; IRS Publication 547; Instructions for Form 4684; IRS, Casualty loss deduction expanded and made permanent; FEMA DR-4856-CA; FTB Publication 1034.

This article is general information, not tax or legal advice for your situation.

Disclaimer: This content is provided for educational purposes only and is not legal, tax, accounting, or financial advice. Every situation is unique, so consult your own attorney, CPA, or financial advisor before making decisions based on this information.