Don't Rush
to Deduct.

My parents' house is in Sierra Madre. When the Eaton Fire came through in January 2025, their home didn't burn — but for several days, none of us knew that. Smoke damage, mandatory evacuation, ash on everything they owned. They came terrifyingly close to losing it all. I personally know more than twenty families from that area and Altadena who weren't as fortunate — people who lost their homes entirely, or lost enough that the distinction between "still standing" and "total loss" felt meaningless.

When the calls started coming in from those families in late January and February, the first question almost every one of them asked was the same: "Can I deduct this on my taxes right now?" The instinct makes complete sense. They suffered a real loss. The IRS allows casualty loss deductions. Why wait?

What most advisors miss — and what I have to walk through carefully with every one of these families — is that "I had a loss" and "I can deduct the loss right now" are two completely different legal questions. Confusing them, and rushing to file before the case is actually closed, is one of the most costly mistakes I see in post-disaster tax work.

Can I Claim an Eaton Fire Casualty Loss on My 2025 Tax Return?

Here's where it gets counterintuitive. The question is not whether you experienced a loss. You clearly did. The question is whether that loss has been "sustained" under the tax code — and those are not the same thing.

Under IRC §165, a casualty loss is deductible in the year it is sustained. The courts and the IRS have been consistent on what "sustained" requires:

The practical consequence: if you claim a $250,000 casualty loss on your 2025 return, receive a refund, and then receive a $400,000 Edison settlement two years later, the IRS applies §111. The recovery is treated as ordinary income in the year received, to the extent it produced a prior tax benefit. You do not get capital gain treatment on the recaptured piece. At combined federal and California rates approaching 50% for many Altadena households, you have converted a capital gain event into an ordinary income event — and locked that in permanently.

Don't rush to deduct. A premature loss claim may put cash in the taxpayer's hands today — but years later, it can cost dearly. The mistake is almost never recoverable once the return is filed and the refund has been spent.

What Does "Sustained" Mean for a Wildfire Casualty Loss Deduction?

When I think about what "sustained" means in practice, I think about the families I know personally from the Sierra Madre and Altadena areas. Some have received partial insurance payments. A few have had their homeowner claims fully closed. But nearly every one of them is connected — directly or through an attorney — to the Edison litigation. That connection alone keeps the case open under the code's requirements.

There are three specific signals that tell me a case has not been sustained:

Should I Deduct My Eaton Fire Loss Before the Edison Lawsuit Settles?

For the vast majority of the Eaton Fire families I work with: no. Here's the math that makes this concrete.

Take a realistic Lane 2 scenario — a homeowner who is genuinely underinsured. Adjusted basis $700,000, insurance proceeds $600,000. Real economic shortfall of $100,000. Filing that loss on the 2025 return at a 37% federal + 9.3% California blended rate saves roughly $46,300 in tax today.

Then Edison settles in 2027. The homeowner's share of the settlement: $450,000. Under §111, the $100,000 that was previously deducted is recaptured as ordinary income in 2027 — approximately $46,300 in additional tax. Net benefit of the early deduction: near zero. But now that $100,000 of the Edison settlement sits in ordinary income in 2027 instead of being handled as part of a single-year analysis when the full picture was actually known. The rush cost this family their best options without saving them a dollar.

The better alternative for most 2025 filers: an open transaction disclosure. It notifies the IRS that you experienced a casualty event, that the matter is not yet concluded, and that you will report the final numbers when all proceeds are known. It does not lock in a wrong number. It does not trigger §111 recapture. It preserves every option — §1033 deferral, loss claim, net-zero analysis — until the full picture is clear.

What Happens If I Claim a Casualty Loss and Then Receive an Edison Settlement?

Based on my reading of the code and how it played out after the 2017 Thomas Fire and Woolsey Fire, the §111 recapture result is almost always worse than families expect when I walk them through it. Here's the comparison:

The open transaction approach costs you nothing except a paragraph of disclosure text on your return. It keeps every option available. It lets the insurance picture, the Edison timeline, and the replacement decision all develop before you commit to a number that follows you through 2027 and beyond.

Frequently Asked Questions