Structural health monitoring (SHM) algorithms based on adaptive least mean squares (LMS) filtering theory can directly identify time-varying changes in structural stiffness in real-time in a computationally efficient fashion. However, better metrics of seismic structural damage and future utility after an event are related to permanent and total plastic deformations. This study presents a modified LMS-based SHM method and a novel two-step structural identification technique using a baseline nonlinear Bouc—Wen structural model to directly identify changes in stiffness due to damage as well as plastic or permanent deflections. The algorithm is designed to be computationally efficient; therefore it can work in real-time. An in silico single-degree-of-freedom (SDOF) nonlinear shear-type structure is used to prove the concept. The efficiency of the proposed SHM algorithm in identifying stiffness changes and plastic/permanent deflections is assessed under different ground motions using a suite of 20 different ground acceleration records. The results show that in a realistic scenario with fixed filter tuning parameters, the proposed LMS-based SHM algorithm identifies stiffness changes to within 10% of true values within 2s. Permanent deflection is identified to within 14% of the actual as-modeled value using noise-free simulation-derived structural responses. This latter value provides important post-event information on the future serviceability, safety, and repair cost.