How casualty losses and insurance reduce your basis

The reduction rule

Publication 551 lists casualty and theft losses with insurance reimbursement among the items that decrease basis. The instruction is to lower the property's basis by two amounts: any insurance or other reimbursement you receive, and any deductible loss that insurance did not cover. This keeps the same dollar from being counted twice: once as a recovered amount or a deduction, and again as part of your investment when you sell.

Why the deductible loss comes off

When you deduct a loss, you have already received a tax benefit for part of your investment in the property. Leaving basis unreduced would let you deduct the same dollars again as a lower gain when you sell. Insurance proceeds are handled the same way: money you got back is not still invested. Whatever stays in basis after those two subtractions is the part of your investment that is still attributable to the property.

Repairs: when they add back

The publication draws a line between repairs that restore and repairs that improve. You must increase your basis by the amount you spend on repairs that substantially prolong the property's life, increase its value or adapt it to a different use. To decide, compare the repaired property to the property before the casualty. If what you spent did not otherwise improve the property, it is deductible as a repair and does not affect basis. That is why two similar-looking repair bills can be treated differently: replacing a damaged wall with the same wall is a restoration; replacing it with a better system may be an improvement.

The publication's example

Example 1 under Adjustments to Basis Examples shows the full flow. In January 2020 you paid $80,000 for real property for a factory, plus $2,000 in commissions and $600 in title search and legal fees. You allocated the $82,600 total as $10,325 to land and $72,275 to the building. You spent $20,000 remodeling the building before it was placed in service. You were allowed depreciation of $14,526 for 2020 through 2024. In 2023 you had a $5,000 uninsured casualty loss on the building, which you deducted. You spent $5,500 to repair the damage and otherwise improve the building.

Starting at $72,275 you add $20,000 of improvements and $5,500 of repair and improvement, which is $97,775. You subtract $14,526 of depreciation and the $5,000 deducted casualty loss, which is $19,526. The adjusted basis on January 1, 2025 is $78,249. In the calculator, enter 72,275 as the starting basis, 20,000 and 5,500 as additions, 5,000 as the deducted casualty loss and 14,526 as depreciation.

MACRS property and partial disposals

There is also a rule for business property depreciated under MACRS. If you dispose of a portion of MACRS property because of a casualty event, you decrease basis by any insurance or other reimbursement and by any deductible loss on the disposed portion that is not covered by insurance. For that rule the deductible loss is generally the decrease in the fair market value from the casualty, limited to the adjusted basis of the disposed portion. The publication refers to its partial disposition rules and to Publication 544 for the details.

What this page does not do

The calculator only does the basis arithmetic. It does not decide whether you may deduct a casualty loss, which for personal-use property is limited by the rules in Publication 547, nor how big the deduction is. It does not handle replacement property after a condemnation or an involuntary conversion, where the basis of the replacement property comes from the converted property and the rules in a separate part of Publication 551. If you receive insurance proceeds above your basis, you may have a gain, and the reporting rules are in Publication 547.

A quick check before you sell

Before you report a sale of damaged property, list every event that touched basis in order: the original cost, improvements, depreciation, the casualty deduction, any insurance check, and any later repair that improved the property. A missing step usually shows up as a gain that is too high or too low. Adding the steps one at a time, as the calculator does, makes the gap easier to spot.

Keeping records

Keep the insurance claim file, the adjuster's report, photographs, repair invoices, and the return that shows the casualty deduction. When you sell the property, those records determine whether your basis includes the repairs, and whether it was reduced by the deduction.

Sources

• IRS Publication 551, Basis of Assets (12/2025): Decreases to Basis, Casualties and Thefts; Adjustments to Basis Examples (Example 1). Read November 2, 2026.

Edition read: Publication 551 (12/2025). This page summarizes the publication and does not replace it.