Eaton Canyon Fire: How to Claim Your Casualty Loss Deduction

The Eaton Canyon fire tore through parts of the San Gabriel Valley in January 2025, and the President declared it a federal disaster. That declaration unlocks a powerful tax provision: IRC §165(i), which lets you deduct your casualty loss on either your 2024 or 2025 federal return.

For homeowners and business owners in the fire zone, this deduction can be worth tens of thousands of dollars — but the rules are technical, and the choices you make now affect both the timing and the size of your tax benefit.

The §165(i) Election: 2024 or 2025?

Normally, a casualty loss is deducted in the year the loss occurs — 2025 for the Eaton Canyon fire. But IRC §165(i) gives you the option to claim it on the preceding year's return — 2024 in this case.

Why would you want to? Speed. If you file (or amend) your 2024 return with the casualty loss election, you can get the refund now instead of waiting until you file your 2025 return in early 2027. When you've just lost your home, getting cash back sooner matters.

The election is made by attaching a statement to your 2024 return (per Rev. Proc. 2016-53 and Treas. Reg. §1.165-11(e)) specifying the disaster and your election to take the loss in the preceding year.

Calculating the Loss

— Federal and California Now Diverge

The casualty loss calculation now has two versions — federal and California — because the OBBBA changed federal rules that California has not adopted.

Federal calculation (post-OBBBA, Qualified Disaster Loss):

1. Start with the loss: the lesser of (a) decrease in fair market value, or (b) your adjusted basis in the property.
2. Subtract insurance reimbursement (actual and reasonably expected).
3. Subtract the $500 per-event floor (OBBBA reduced this from $100 for Qualified Disaster Losses).
4. No 10% AGI floor federally. Eliminated for Qualified Disaster Losses. The full net loss above $500 is deductible. Itemizing is not required.

California calculation (unchanged):

1. Same starting loss amount.
2. Subtract insurance reimbursement.
3. Subtract the $100 per-event floor — California still uses $100.
4. Subtract 10% of AGI — California still applies the 10% floor. With $150,000 AGI, the first $15,000 of net loss produces no California deduction. Itemizing is still required for California.

Practical example of the divergence: Client with $200,000 AGI and a $50,000 net casualty loss. Federal deduction: $49,500 (no AGI floor). California deduction: $29,900 ($50,000 − $100 − $20,000 AGI floor). Every Eaton Fire client now needs both calculations done separately.

Personal Property vs. Business Property

The rules differ by property type — and now differ between federal and California even for personal-use property.

Personal-use property (residence, vehicle, household contents) — post-OBBBA:

• Federal: No 10% AGI floor. $500 per-event floor. No itemizing required.
• California: 10% AGI floor still applies. $100 per-event floor. Itemizing required.

Business/rental property: Losses deducted under §165(c)(1) — no AGI threshold, no per-event floor for either federal or California. Report on Schedule E or entity return. The OBBBA changes do not affect business property losses — they were already not subject to these floors.

Insurance Timing Issues

If your insurance claim hasn't settled, you must still reduce your loss by the amount you reasonably expect to receive. If the actual payment turns out to be less, you claim the additional loss in the settlement year. If you receive more, you may have taxable income.

Don't wait for insurance to fully resolve before claiming the deduction. Estimate conservatively, claim what you can, and adjust later if needed.

Documentation Checklist

• Pre-fire and post-fire appraisals or valuations
• Insurance claim documents and correspondence
• Photos of damage (and pre-fire condition if available)
• Receipts for temporary housing and emergency expenses
• Records of basis in the property (purchase price, improvements, depreciation)
• FEMA or disaster declaration documentation

The Eaton Canyon fire is a federally declared disaster. You have the choice of claiming the loss in 2024 or 2025. Model both scenarios — the right year depends on your specific AGI and filing status.

The Bottom Line

If you were affected by the Eaton Canyon fire, you have real tax relief available. The §165(i) election lets you accelerate the deduction to 2024, and the choice between filing years can significantly impact the net benefit. Work with your tax professional to model the numbers, file the election properly, and document everything — the IRS will want to see it.