Although the TCJA suspended the deduction for most personal casualty losses, an exception to the suspension rule is where a taxpayer has personal casualty gains for the tax year (Sec 165(h)(5)(B)). In such a case, a taxpayer may deduct the portion of the personal casualty loss not attributable to a federally declared disaster (a “nonfederal casualty loss”) to the extent the loss doesn't exceed the personal casualty gains (Code Sec. 165(h)(5)(B)(i)). Personal casualty gains occur where the taxpayer receives insurance or other proceeds in excess of the adjusted basis of the destroyed, damaged, or stolen property.  

Example: Although it is highly unlikely you will encounter taxpayers with three different casualty types for the year, we provide this example to show how non-deductible personal casualty losses can be used to offset casualty gains.  Jack and Sally have an AGI of $100,000 for the current tax year, and the following casualties for the year. 

First the nonfederal loss, $29,900, is used to offset the personal casualty gain of $40,000.  Any remaining gain, in this case $10,100, is used to reduce the federal disaster loss of $39,900, resulting in a net loss of $29,800, which is now reduced by 10% of the taxpayers’ AGI, and the deductible federal disaster loss becomes $19,800.