The January 2025 California Wildfires: Understanding Tax Relief for Victims Through Federal and California Casualty Loss Rules

Blake Christian, HCVT Tax Partner
January 10, 2025

Updated February 7, 2025

Click here to download our Recommendations for Actions to Take After a Fire Loss.

The wildfires that have swept across Southern California have caused widespread devastation, leaving families, businesses, and communities in turmoil. As residents grapple with the aftermath, there is some relief available in the form of tax benefits through the federal and California casualty loss rules. These rules, both at the federal and state level, provide a critical financial lifeline for victims, enabling them to reduce their tax, access financial aid, and begin rebuilding their lives.

The January 2025 Wildfires: A Devastating Impact

California is no stranger to wildfires, with large swaths of the state regularly affected by fires during the dry summer months. However, these recent wildfires have been particularly severe, fueled by a combination of dry conditions, high winds, and record-high temperatures. These fires have destroyed tens of thousands of acres and thousands of homes and businesses, damaged critical infrastructure, and caused severe environmental harm. These fires continue to burn with a preliminary estimate of over $50 billion in damage.

As residents face these overwhelming losses of their properties, possessions, and livelihoods, understanding the potential tax relief available can be crucial in helping them recover financially.

Tax Filing and Payment Postponement

The Internal Revenue Service announced on January 10, 2025 tax relief for individuals and businesses in LA County affected by wildfires and straight-line winds that began on Jan. 7, 2025. These taxpayers now have until Oct. 15, 2025 to file various federal individual and business tax returns and make tax payments. Governor Newsom announced on January 11, 2025 that California would align with the federal postponement period for 2024 income tax returns as well as tax payments that would have been due between January 7 and October 15, 2025.

Taxpayers outside the disaster area, but whose records are located in the affected area, are able to apply for postponement. We are continuing to monitor developments with respect to state conformity as well as to whether the postponement will impact additional California counties.

What Are Casualty Losses?

A "casualty loss" refers to property damage or economic loss caused by an unexpected, sudden, or unusual event, such as a fire, flood, or earthquake. Under the U.S. tax code, both federal and California tax law allows individuals and businesses to deduct certain types of losses resulting from such disasters.

In the case of the January 2025 wildfires, individuals and businesses affected by the fires may be eligible to claim a casualty loss deduction. This deduction can help reduce taxable income and thus provide financial relief by lowering the amount of taxes owed, or recovering taxes paid for the prior years.

Federal Casualty Loss Rules (updated 1/24/25)

On Wednesday, January 8, 2025, President Biden signed a major disaster declaration for the wildfires impacting various communities in Los Angeles County. This allows affected individuals and businesses to access individual program assistance from FEMA and other programs to cover expenses such as temporary accommodations and financial assistance for destroyed real and personal property.

President Biden's federal disaster designation is critically important to the tax treatment for fire victims. Absent this designation, taxpayers would not be entitled to personal casualty loss deductions. The Presidential designation also allows taxpayers the flexibility of deducting their casualty loss on either their 2024 or 2025 tax returns. Claiming the loss in 2024 may provide a refund much more rapidly - but each taxpayer's 2024 and 2025 tax facts must be carefully evaluated.

On December 12, 2024, President Biden signed the Federal Disaster Relief Act of 2023 (2024 Legislation) into law. This legislation, which was primarily focused on pre-2025 California wildfires, eliminated the 10% AGI threshold that taxpayers were previously required to exceed in order to claim a deductible expense for federal income tax purposes. Taxpayers who are covered by the 2024 Legislation are generally no longer required to itemize their deductions (Schedule A) in order to claim a casualty loss, but Congress increased the $100 “floor” to $500. California does not conform to the 2024 Legislation.

There is uncertainty among tax professionals as to whether the 2024 Legislation applies to the January 2025 Southern California fire victims. Currently, we believe the 2024 Legislation only applies to presidentially declared disasters occurring between January 1, 2020 and December 12, 2024, and therefore would not qualify for the more favorable tax rules (e.g., no 10% AGI floor, exemption of proceeds received from non-insurance sources, no requirement to file a Schedule A in order to claim a casualty deduction) without an act from Congress. 

The Internal Revenue Service (IRS) and California Franchise Tax Board (FTB) have provided additional guidelines that generally include postponed tax filing deadlines, delays in making tax payments and possibly the option of claiming the 2025 casualty loss on either their 2024 or 2025 tax returns.

At the federal level, the IRS allows taxpayers to deduct losses related to casualty events like the California wildfires, provided specific criteria are met. Here is a current overview of the key federal rules regarding casualty losses:

  1. Eligible Losses: Casualty losses must be caused by a sudden, unexpected, or unusual event, and the damage must be beyond normal wear and tear. This includes fire, flood, and other natural disasters.
    • In the case of the 2025 California wildfires, damage caused by the fires clearly qualify for personal and/or business casualty losses for tax purposes.
  2. Determining Amount of Federal Loss: Before deducting any casualty losses, a property’s value must be determined. For all personal-use property and business property not completely destroyed, the amount of your loss is determined by the lesser of the adjusted basis of your property or the decrease in fair market value (FMV) of your property as a result of the casualty (for businesses, including rental properties, that are destroyed, the amount of your loss is your adjusted basis minus any salvage value). To determine your deduction, you must determine your adjusted basis in the property before the casualty, determine the decrease in FMV due to the casualty, and subtract insurance or other reimbursements received now or in the future from the smaller of the two amounts.
    • For example, a personal-use property with an adjusted basis of $250,000 and a decrease in FMV of $1,000,000 will determine their loss using the smaller amount of $250,000. An insurance reimbursement of $50,000 (assume they only insured personal property) will result in a preliminary loss of $200,000 ($250,000 - $50,000) before the 10% AGI floor and the $100 per event reduction.
  3. Determining Amount of California Loss: Similar to federal, for California purposes, the total loss must still exceed $100 per event plus 10% of the taxpayer's adjusted gross income (AGI) to qualify for a tax deduction.
    • For example, if a taxpayer’s AGI is $500,000 and the casualty loss (after insurance proceeds) amounts to $300,000, the deductible amount would be $300,000 reduced by $100 as well as $50,000 (10% of their AGI). The $50,100 reduction to the $300,000 loss would result in a net California casualty loss deduction of $249,900. This 10%AGI limitation applies only to personal-use property (including primary residences) and does not apply to business property or any portion of the home that is taken as a home office deduction. Therefore, California business casualty loss deductions will generally be higher than personal-use property casualties.
  4. Claiming the Deduction: With a Presidential Disaster designation, victims of the California wildfires can claim their casualty losses in the year the damage occurred, or they may generally choose to claim the loss in the previous tax year, allowing for a refund of taxes paid in that year. This flexibility specific to federally declared disasters is beneficial for victims who may be facing immediate financial challenges.
  5. Insurance Proceeds: Casualty loss deductions are limited to amounts not compensated for by insurance proceeds. If the victim has insurance coverage for the losses, the amount of any insurance payout must be subtracted from the loss claim in determining any loss. If the insurance payout does not cover the entire loss, the taxpayer can still claim a deduction for the remainder of the loss. Due to many property insurers reducing their policy underwriting in California, some percentage of these fire victims were uninsured or under-insured and these casualty loss tax benefits will become even more critical. In the case where insurance pays out amounts in excess of the taxpayer's tax basis in the destroyed or damaged property, a tax gain may be realized. It is important to note that a timely insurance claim for reimbursement of loss must be made for it to be deducted as a casualty loss.
    • The aforementioned Federal Disaster Tax Relief Act also allows certain pre-2025 wildfire victims to generally exclude from federal gross income all compensation from losses or damages resulting from qualified wildfire relief payments (other than lost wages). Congress eliminated from this exclusion amounts paid by insurance companies "or otherwise," and California also conforms to this gross income exclusion for fire-related payments coming from parties other than insurance companies.
  6. IRC Section 121, 1031 and 1033 (updated 2/7/25): These are various federal code sections that may be available for California fire victims to exclude (IRC Section 121) or defer (1031 and 1033) any gain that may be realized from the disposition of their residential or business properties. In the case of a sale or non-replacement of a personal residence, the taxpayer may be able to claim a $250,000 (Single or Married Filing Separate) or $500,000 (Married Filing Joint) exclusion under IRC Section 121. In the event the sales proceeds and/or insurance proceeds received by the property owner exceed the tax basis of the victim’s property, the taxpayer can find a replacement property and invest those proceeds into a new property. The 1031 rules generally have a very short identification (45 days) and replacement period (180 days); however, these deadlines are extended under Rev. Proc. 2018-58, while the 1033 rules applicable to Involuntary Conversions generally allow up to two years from the end of the year that the taxpayer first received proceeds to acquire replacement property (four years if the proceeds are for a taxpayer's principal residence or any of its contents).

California Gain Example

Tina’s house is destroyed by fire on January 7, 2025. The house had an adjusted basis of $350,000. Prior to the fire, Tina had lived in and used the house as her principal residence for 20 years. Tina’s insurance company pays her $1,000,000 for the house during 2025. Tina realizes a gain of $650,000 for the house ($1,000,000 - $350,000). On November 15, 2027, she pays $300,000 for a new house in another state and makes $100,000 in improvements by year-end. For federal and state purposes, her gain of $650,000 is reduced to $250,000 after deducting the $300,000 and $100,000 of expenditures for the replacement home under IRC Section 1033.

For purposes of IRC Section 121, the destruction of the house is treated as a sale. Tina can exclude the remaining $250,000 of the realized gain from her gross income (principal residence exclusion), leaving her with no taxable gain.

California Casualty Loss Rules (updated 1/24/25)

Unless the 2024 Legislation is expanded to include 2025 wildfire victims, the federal and state rules are very similar.

  1. California’s Approach: In California, casualty loss deductions are handled through the state income tax system, similar to the federal system. Taxpayers can deduct the portion of their loss that exceeds a set threshold and impacts their overall income.
  2. No CA Loss Carryback or Carryforward: While the IRS allows taxpayers to carry their casualty loss claims back to previous tax years (e.g., if a taxpayer has a casualty loss that exceeds their 2024 or 2025 taxable income, the remaining loss can generally be carried back three years or forward to future years), California follows a more limited approach. If a California taxpayer has a casualty loss that exceeds their 2024 or 2025 taxable income, no loss can be carried back and the carryover loss cannot be used until 2027, absent a change in California law.
  3. Special Disaster Provisions: Be alert to potential modifications to the current provisions as California often enacts special tax relief measures in response to major disasters, such as wildfires. These measures can include more generous deductions, suspension of certain filing deadlines, and other forms of assistance to help victims recover. California may provide additional aid in the wake of the 2025 wildfires, including allowing taxpayers to deduct losses that otherwise might not be allowed under normal circumstances.

How to Claim Your Income Tax Deductions

To claim a casualty loss on your federal and California state tax returns, you will need to complete the following federal and California state specific forms:

For detailed guidance on claiming a disaster loss in California, refer to the IRS Publication No. 515 and the California Franchise Tax Board’s Publication 1034.

Los Angeles County Property Tax Relief (updated 1/27/25)

Since your property has decreased in value, you can request a property tax reassessment through Misfortune and Calamity (M&C) relief, and reduce your property taxes for 2025 or even refund property taxes that may have been prepaid. In order to qualify, the estimated property damage must be at least $10,000 in market value and claims must be filed with the county assessor within the specified time or within 12 months from the date of damage, whichever is later. Should you file an M&C Claim, and you pay your property taxes directly to the Treasurer and Tax Collector (TTC) (not through a mortgage lender with an impound account), the TTC recommends that you do not pay the outstanding installment for the Annual Secured Property Tax Bill as the claim also serves as a request to defer payment without penalty or interest.

Property tax reassessment is available for real property, business equipment, fixtures, orchards, aircraft, boats, and certain manufactured homes. It is not available to property that is not assessable, such as state licensed manufactured homes or household furnishings.

On January 16, 2025, Governor Newsom issued an executive order postponing property tax payments until April 10, 2026 for the following zip codes: 90019, 90041, 90049, 90066, 90265, 90272, 90290, 90402, 91001, 94010, 91106, 91107, 93535, and 93536. This postponement does not apply to any taxes on property that was delinquent as of January 6, 2025, nor on taxes paid through an impound account.

Use this link to apply for M&C relief:  https://assessor.lacounty.gov/tax-relief/disaster-relief

More information about relief for properties impacted by a disaster is available here.

Key Steps for Fire Victims to Maximize Their Tax Relief

  1. Document Losses: Proper documentation is essential for claiming a casualty loss deduction. Fire victims should keep detailed records of the damage, including photographs, written descriptions, and any repair or replacement costs. If possible, victims should also keep receipts and statements from their insurance companies.  There are also companies that can assist fire victims with documenting their losses.
  2. File a Timely Claim: Victims should file their casualty loss claims as part of their annual tax return. If they missed the tax filing deadline, the IRS and California’s FTB provide provisions for late filing and special disaster-related extensions. It is also important to stay updated on any additional emergency extensions or programs that may be introduced in response to the 2025 wildfires.
  3. Consult a Tax Professional: The rules surrounding casualty loss deductions can be complex, and the financial situation for wildfire victims may vary widely. Seeking guidance from a tax professional who understands both federal and California tax laws can ensure that victims claim all possible benefits and navigate any special tax relief measures available.
  4. Consider Other Relief Options: Victims may be eligible for other forms of financial assistance, such as disaster relief grants, low-interest loans, and emergency funding. While these programs are not directly related to taxes, they can complement the tax benefits and provide additional relief for those struggling to rebuild.

Conclusion

The 2025 California wildfires have caused unprecedented destruction, but the federal and state tax systems provide crucial support for victims through casualty loss deductions. Both the IRS and California’s FTB offer tax relief measures that can reduce the financial burden for those affected, enabling them to start rebuilding their homes, businesses, and lives.

By understanding the rules and seeking professional guidance, wildfire victims can take full advantage of the tax benefits available, helping them recover and regain their financial footing in the wake of this devastating disaster.

Disaster Resources

Click here to download our Recommendations for Actions to Take After a Fire Loss.

Additional Resources can be found at:

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Blake Christian is a Tax Partner in the Long Beach and Salt Lake City offices of HCVT – the largest firm based in Southern California.  Mary Ceja is a Tax Staff in the Phoenix office of HCVT.  For more information please check their website at: www.hcvt.com.

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