To determine the amount of casualty loss you can deduct, you will need to know what you paid for the property plus the cost of any improvements you made to the property before the natural disaster. You will also need to know the fair market value of the property before the disaster as well as after the disaster. This will tell you the total loss in value.
For the deduction, you will use either the cost of the property or the loss in value, whichever is smaller. You will also need to subtract any amounts paid by insurance and FEMA.
Example: Jill bought her home for $150,000. Before the flood, Jill’s home was worth $190,000. After the flood, it was worth $90,000. This means her home lost $100,000 in value. She has to pick the lowest number between what she paid ($150,000) and loss in value ($100,000). Therefore, she can claim a $100,000 loss. But Jill also got an insurance payment of $50,000. She must subtract that from the $100,000 loss. Therefore, her casualty loss is $50,000.