Natural disasters can be expensive. This is particularly true for those who own or have an interest in real estate.
Our tax laws provide some relief through casualty loss deductions and theft loss deductions. But what happens when someone pays to repair property they don’t legally own? This question is particularly relevant when parents continue to financially support their adult children by paying for property repairs after a disaster. Can they claim the casualty loss deduction on their own tax returns?
The recent case of Taylor v. Commissioner, T.C. Summary Opinion 2025-10 (March 3, 2025), addresses this situation and provides an opportunity to consider the ownership requirement for casualty loss deductions.
Facts & Procedural History
The taxpayer and his then-spouse acquired real estate in Texas in 1992. Following their divorce in 2000, the taxpayer-husband transferred his interest to his wife via a special warranty deed.
The taxpayer-wife died in 2007 and her minor daughters inherited the property. The taxpayer-husband was appointed guardian of the estate for his then-minor daughters.
The daughters reached adulthood by 2012, so the taxpayer-husband transferred the property to the children via a deed. When Hurricane Harvey struck in 2017, the property was owned by the taxpayer-husband’s now adult daughters. The taxpayer-husband did not live in the property in 2017.
The taxpayer-husband paid expenses to repair the damage to the property and he paid the insurance on the property. He claimed a $49,500 casualty loss deduction on his 2017 tax return for the damage.
The IRS conducted a tax audit and issued a Notice of Deficiency in 2021, determining a deficiency of $17,537 in federal income tax and an accuracy-related penalty under Section 6662(a). The IRS did not challenge the substantiation for the casualty loss deduction, as it normally does. Rather, it challenged the deduction on the basis of the taxpayer’s ownership of the property.
The taxpayer petitioned the U.S. Tax Court, challenging the IRS’s determination. The question for the court was whether the taxpayer-husband is entitled to a tax loss for the property that he used to own given that he paid for the repairs to the property.
About Casualty Loss Deductions
Section 165(a) of the tax code provides for a tax loss deduction for “any loss sustained during the taxable year and not compensated for by insurance or otherwise.” This is a very broad provision. This broad provision is then narrowed by specific limitations that are set out in the tax code.
Specifically, for individual taxpayers, Section 165(c) restricts deductible losses to three categories:
- Losses incurred in a trade or business
- Losses incurred in transactions entered into for profit, though not connected with a trade or business
- Personal losses arising from “fire, storm, shipwreck, or other casualty, or from theft”
The third category—personal casualty losses—enables taxpayers to deduct losses from sudden, unexpected events like hurricanes, floods, and fires. These deductions provide important tax relief for taxpayers facing significant financial setbacks due to disasters and other unexpected events.
The Ownership Requirement for Casualty Losses
While Section 165 itself doesn’t explicitly say that there is an ownership requirement, the courts have consistently held that only the owner of property at the time of a casualty can claim the resulting loss deduction. This judicial interpretation reflects the fundamental purpose of the casualty loss provision: to provide tax relief to those who have suffered an economic loss from damage to their property.
The leading case establishing this principle is Draper v. Commissioner, 15 T.C. 135 (1950), where the Tax Court denied a casualty loss deduction to a taxpayer who replaced his adult daughter’s property destroyed in a fire. The court held that since the taxpayer didn’t own the property, he couldn’t claim the deduction, regardless of his financial contribution to replacing the items.
This ownership requirement continues to be enforced in more recent cases. In Rogers v. Commissioner, T.C. Memo. 2019-90, the Tax Court reaffirmed that “a casualty loss deduction is authorized only when the claimant is the owner of the property with respect to which the loss is claimed.”
Paying for Someone Else’s Property Repairs
Many taxpayers voluntarily pay expenses for property they don’t own–particularly when helping family members. That is the situation in the Taylor case.
These payments might include:
- Parents paying repair costs for properties owned by their adult children
- Individuals paying expenses for properties owned by elderly parents
- Taxpayers contributing to repairs for damaged properties in their communities
When these payments are made out of generosity or family support, they generally do not create a deductible interest in the property for tax purposes. The IRS and courts consistently maintain that paying expenses for someone else’s property–regardless of the amount or reason–does not transfer the casualty loss deduction to the payer.
From a tax perspective, voluntary payments for property expenses are more akin to gifts than investments creating deductible interests. This principle applies even in cases where the taxpayer previously owned the property or has an emotional attachment to it.
The court in Taylor acknowledged that the taxpayer may have paid for the repairs to the damaged property. However, it found that these voluntary payments did not establish a deductible interest in the property under Section 165. The court noted that a tax deduction for a casualty loss for property is allocated to the person who owned the property and incurred the economic loss, not to those who voluntarily pay to repair it. Citing Draper v. Commissioner, the court reaffirmed that a taxpayer cannot claim casualty loss deductions for property owned by adult children, even if the taxpayer pays for expenses related to that property.
Exceptions to the Ownership Rule
While the general rule requires legal ownership for casualty loss deductions, tax law recognizes certain limited exceptions where non-title holders might claim such deductions. These exceptions generally involve taxpayers who have economic interests in the property despite not holding legal title:
- Equitable ownership – where a taxpayer is making payments under a contract to purchase property but hasn’t yet received formal title
- Leasehold interests – where a tenant has made substantial improvements to leased property
- Life estates and remainder interests – where the taxpayer holds a legally recognized partial interest
- Properties held in certain trust arrangements where the taxpayer maintains beneficial ownership
Taxpayers who wish to maintain tax benefits while supporting family members might consider alternative approaches based on these interests. With a little tax planning, such as converting a house to a rental property (rental property losses would fall under the business/profit-seeking categories of Section 165(c) rather than personal casualty losses), maximizing partial asset dispositions, etc., the taxpayer very well may be able to claim the casualty loss for property that they do not own. Suffice it to say that these approaches should be implemented with proper documentation and genuine economic substance to withstand IRS scrutiny.
The Takeaway
This case reiterates that a casualty loss deduction goes to the owner. The taxpayer has to own the property that suffered the damage. Simply paying for repairs or maintenance does not transfer the deduction to the payer, regardless of family relationships or previous ownership history. When supporting family members with property expenses, taxpayers should understand that these payments generally don’t create tax benefits. If tax considerations are important, alternative arrangements that maintain legitimate ownership interests should be established before a casualty occurs.
Watch Our Free On-Demand Webinar
In 40 minutes, we’ll teach you how to survive an IRS audit.
We’ll explain how the IRS conducts audits and how to manage and close the audit.
