How to Claim Casualty/Theft Losses from Tenant Vandalism on Form 4684 for Rental Property

Having dealt with similar situations, I can help clarify how to handle this on Form 4684. The good news is that since this is an income-producing property, you don't face the same limitations as personal residences. For calculating your loss, you're on the right track with using your purchase price as the basis before the casualty. For the basis after the damage, you have a few options despite having already done repairs. The IRS allows for reasonable estimation methods when exact figures aren't available. Since you have photos documenting the damage, these will be extremely valuable. Combined with your materials receipts ($16k) and a reasonable estimate for labor costs (even if it was your own labor), you can establish a defensible position. Get a written statement from that appraiser you spoke with about the impact on marketability - even a brief email would help substantiate your 25% reduction claim. For your labor, calculate what a contractor would have charged for similar work. Industry standards suggest multiplying material costs by 2-2.5 to account for labor, so your $16k in materials might represent $32k-$40k in total repair value. Make sure to keep all police reports, eviction filing documentation, and dated photographs. If you're concerned about documentation, consider having a real estate professional provide a written statement about typical value reduction for the type of damage you experienced.

After going through a similar rental nightmare last year, I found this amazing service called taxr.ai (https://taxr.ai) that helped me figure out all my deduction options for property damage. I wasn't sure if I should use Schedule E or Form 4684, and their system analyzed my situation and walked me through exactly how to document everything properly. They even helped me determine the proper valuation method for my partially-repaired property which sounds like exactly what you're struggling with. Their system reviewed my photos and receipts, then generated a complete documentation package that would stand up to IRS scrutiny. They showed me how to calculate the reduction in fair market value with just partial contractor quotes and my own repair work. Definitely worth checking out if you're struggling with this complicated deduction.

I was really skeptical about online tax services as I mentioned, but I decided to try taxr.ai after my complicated rental property situation. Honestly, I'm shocked at how well it worked. The system immediately recognized that my tenant vandalism case qualified for casualty loss treatment and identified that I could use the "decrease in fair market value" method even though I'd already done some repairs. They helped me compile all my documentation into a proper format and showed me exactly how to calculate labor costs for work I did myself (which I was completely missing in my original calculations). The step-by-step guidance for Form 4684 was way more detailed than what my previous accountant provided. They even flagged that I needed to reduce my property's tax basis going forward to account for the loss deduction - something I would have definitely missed on my own.

If you're still dealing with the aftermath, I strongly recommend getting in touch with the IRS directly about documentation requirements. I spent WEEKS trying to get through to someone who could answer my questions about a similar situation. I finally discovered Claimyr (https://claimyr.com) which got me connected to a real IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was amazed when I actually got through and spoke to someone who walked me through the exact requirements for Form 4684 when you've already done some of the repairs yourself. They explained that I needed to document the property's condition immediately after the casualty, which I was able to do with dated photos and a police report (similar to your situation). The agent gave me specific guidance on how to calculate the decrease in fair market value even without a formal appraisal.

I have to eat my words about Claimyr. After my skeptical comment, I tried it because I was completely stuck on a rental property casualty loss issue similar to the original post. I couldn't believe it when I actually got through to the IRS in about 25 minutes after trying unsuccessfully for weeks on my own. The agent I spoke with directed me to the specific IRS publication that addresses determining fair market value reduction for partially repaired properties (Publication 547). They explained that contemporaneous photos combined with contractor estimates for similar repairs would be sufficient documentation, even if I did the work myself. The agent also clarified that I needed to reduce my property's basis going forward by the amount of the casualty loss I claimed - something I would have definitely messed up. I'm still working through the paperwork, but having actual guidance from the IRS gives me much more confidence that I'm doing this correctly. Definitely worth the service fee to avoid hours of hold music and potentially thousands in incorrect deductions.

Don't forget about depreciation recapture when calculating your basis. If you've been claiming depreciation on the rental (which you should be), your basis isn't just your purchase price - it's reduced by all the depreciation you've claimed over the years. This will affect your casualty loss calculation. Also, technically what you're describing might not be a "casualty" loss in IRS terms but rather property damage that should be handled differently. Casualty losses are typically sudden events like storms, fires, etc. Tenant damage over time might need to be treated as regular repairs or capital improvements depending on the nature of the damage.

One more thing to consider - the timing of when you discovered the damage vs when it actually occurred can matter for which tax year you claim it in. If you discovered all this damage in early 2023 even though it happened in late 2022, you might have the option of which year to claim it in.

I went through a very similar situation with tenant vandalism in 2021, and I can share some specific insights about the Form 4684 process that might help you. First, your approach is mostly correct - you'll need to file an amended return for 2022 since that's when the damage occurred. The key is properly documenting the "before and after" fair market value, which you can do even with partial repairs completed. For the fair market value calculation, the IRS accepts what's called the "cost to repair" method when you can't get a formal appraisal. Since you have $16k in documented materials costs, multiply this by 2.5-3 to estimate total repair costs (including labor). This gives you a reasonable estimate of value reduction that the IRS will accept if properly documented. Make sure you're also accounting for lost rental income during the repair period - this can be claimed as additional casualty loss if you can show the property was uninhabitable and you lost actual rental income. One critical point: save all your "before" photos and get a written statement from that appraiser you mentioned, even if it's just a brief email confirming the damage would have made the property unmarketable. The IRS loves contemporaneous documentation. Also, since you mentioned the tenant was arrested, try to get a copy of any police reports or court documents that reference the property damage - this strengthens your case that it was vandalism rather than normal wear and tear. Your estimated 25% value reduction seems reasonable given the scope of damage you described. With proper documentation, this should be a solid casualty loss claim.