The IRS considers a casualty as the damage, destruction or loss of property resulting from a sudden, unexpected or unusual event. The casualties that we automatically think of for deduction are auto accidents, hurricanes, civil disturbances, earthquakes, explosions, fires, floods, hail, ice and snow, vandalism, winds and tornados. Other incidences will also qualify including theft from larceny, robbery and embezzlement.

Really, the thing that qualifies you for a casualty deduction is simple. The event that causes the damage or loss must be sudden and swift, not slow and progressive. If your bathroom has water damage from a slow leak between tiles, you do not have a deduction. If the pipe freezes and breaks, ruining your carpet and walls, your loss qualifies for deduction. Non-deductible losses include termites, dry rot, corrosion and rust.

The deductible amount is determined through several calculations. First, you must determine the fair market value of the property before and after the damage. This is the price for which you would be able to sell the property. Next, establish your basis in the property. This is your cost plus improvements, less any depreciation. Your loss is the lesser of the two calculations.

For example, the IRS cites the destruction of a painting worth $100,000 as a total loss. The painting was originally purchased for $1,000. The decrease in market value is $100,000 since it was completely lost. But the buyer?s basis is only $1,000. The deductible loss is limited to $1,000, because the buyer?s actual investment in the property is less than the decrease in value.

This deduction is only available if you file a timely insurance claim. If you choose not to file, you can only deduct the portion of the loss that would not have been covered by insurance.

If the area in which the property exists is declared a federal disaster by the President, you have the option of deduction the loss on the previous year?s tax return. This allows for an immediate tax benefit. Other casualties and losses are deductible only in the year the event took place.

By declaring a casualty or theft deduction, you can help minimize the financial impact of a disaster. But you must always make sure that your deduction is backed up by paperwork. Deductions can be a red flag to the IRS, so make sure that you retain information that supports your submitted loss. Keep photos of the lost or damaged items, receipts and appraisals and police reports as proof of loss.

Sometimes, we don?t know that certain deductions exist. By being informed of what is deductible, you can help your accountant give you the best return possible.