Is a casualty loss on rental property deductible?

Why rental property is treated differently

The deduction limits in Publication 547 are written for personal-use property. For tax years beginning after 2017 the personal rule allows a casualty or theft loss only when attributable to a federally declared disaster, and Table 2 reduces it by $100 per event and 10% of AGI. The publication says plainly that losses on business property and income-producing property are not subject to those rules. A tenant-occupied house, an office building or a piece of equipment used in a trade gets the older, broader treatment: any sudden, unexpected or unusual event can produce a loss, declared disaster or not. Home offices and rented rooms in your own home are the complication, covered below.

The two formulas

If the rental is stolen or completely destroyed, the decrease in value is not considered. The loss is your adjusted basis, minus any salvage value, minus any insurance or other reimbursement. Adjusted basis includes your cost plus improvements and minus depreciation, so years of depreciation lower the loss. If the property is only damaged, the loss is the smaller of the adjusted basis or the decrease in fair market value, minus insurance, as with personal property. A separate rule applies to inventory, and if you are a lessee liable for damage, the loss is what you must pay to repair, minus reimbursement.

The publication’s example is a flood that damages a building on leased land, half business and half residence, that cost $400,000. The business half has an adjusted basis of $176,000 ($200,000 minus $24,000 depreciation). The value of each half falls by $30,000 and each half receives $20,000 of insurance, so the business loss is $30,000 (the smaller of the two figures) minus $20,000, or $10,000, and no $100 or 10% reduction applies to it. The personal half also figures to $10,000 before limits, but with $100 and 10% of $125,000 AGI it deducts nothing.

A quick check with the calculator

A rental building has an adjusted basis of $176,000 after depreciation. A flood cuts its value from $190,000 to $160,000 and insurance pays $20,000. The smaller of $176,000 and $30,000 is $30,000, minus $20,000 is a $10,000 loss. If instead the building burned to the ground and the insurer paid $150,000 with $5,000 of salvage, the loss is $176,000 minus $5,000 minus $150,000, or $21,000, and the market value figures are not used at all. Tick the destroyed box to switch formulas.

Partly personal, partly rental

When property is used partly for personal purposes and partly for business or income-producing purposes, you figure the two losses separately, allocating basis, before and after values and insurance between the uses. The $100 and 10% rules apply only to the personal-use portion. The publication also warns that if the loss involved a home you used for business or rented out, your deductible loss may be limited, pointing to Section B of the Form 4684 instructions, and that passive-activity limits (Form 8582) can apply to property used in a passive activity.

Where the loss and gain are reported

Business and income-producing losses and gains go on Form 4684. For property held one year or less, an individual reports income-producing property losses on Schedule A, and the business net on Form 4797. For property held more than a year, if business and income-producing losses exceed gains, the loss from business property is combined with total gains and the net is reported as an ordinary gain or loss on Form 4797; individual losses on income-producing property are deducted on Schedule A. If a rental produces a gain instead because insurance exceeds basis, depreciation allowed or allowable may be recaptured as ordinary income; see the depreciation recapture calculator and the rental depreciation calculator. A loss large enough to push deductions above income can create a net operating loss that lowers tax in a later year.

Rebuilding and replacement

Insurance money you spend rebuilding can postpone a gain, and if your rental was in a federally declared disaster area, tangible property acquired for use in any business counts as similar for replacement purposes. The publication’s owner-investor test asks whether the properties are of similar service to you, carry similar business risks and demand similar management; a rental building replaced by another rental building can pass. See whether a casualty gain is taxable and the replacement period.

Sources

• IRS Publication 547, Casualties, Disasters, and Thefts (2025): Figuring a Loss; Business or income-producing property; How To Report Gains and Losses. Read November 2, 2026.

Edition read: Publication 547 (2025), for use in preparing 2025 returns. Dollar limits and dates on this page are the figures printed in that edition; legislation enacted after it was published is not reflected, so check the current publication, Form 4684 and its instructions for your tax year. This page summarizes the publication and does not replace it.