A deduction against your rental income is permitted for any casualty loss sustained during the tax year not compensated for by insurance or otherwise.
So the loss claimed is going increase your loss as you mention above.
The passive activity loss (PAL) rules do not apply to casualty losses sustained in a passive activity unless losses that are similar in cause and severity occur regularly in the activity.
If income from an unexpected insurance reimbursement is reported in a year after a casualty loss has been treated as nonpassive under this rule, the income is also treated as nonpassive
@Ashish Acharya That’s what I was looking for! I appreciate it.
Casualty loss is deductible, but it is not considered passive, so it does NOT count towards the $25k passive loss. Even if your "normal" passive losses are limited, your casualty loss is still deductible against regular income, such as W2.
On a related note - you will need to subtract the casualty loss from the basis of the property. This will increase capital gain when you sell.
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