IRS Adopts Procedures for Corrosive Drywall Losses
The Internal Revenue Service has promulgated Revenue Procedure 2010-36 providing guidance to homeowners with damage to their residences from corrosive drywall. The procedure allows an affected homeowner to treat damages from corrosive drywall as a casualty loss for income tax purposes and provides a “safe harbor” formula for determining the amount of the loss. Taxpayers foregoing the safe harbor treatment must otherwise comply with Internal Revenue Code requirements relating to the deductibility of casualty losses.
According to the Revenue Procedure, under current tax law damage to personal use property such as a home or appliances must arise from a fire, storm, shipwreck or other casualty or theft to be deductible. In addition, the damage cannot result from progressive deterioration but instead must result from a sudden, unexpected and unusual event. A deduction for a casualty loss also is deductible only for the taxable year in which the loss is sustained. Further, losses for which there is a reasonable prospect of recovery (through insurance or otherwise) cannot be deducted until there is reasonable certainty whether or not reimbursement will be received.
The Revenue Procedure adds flexibility, allowing a homeowner to treat repair costs to the residence or appliances as a casualty loss in the year of payment. If the homeowner does not have a pending claim for reimbursement (and does not intend to pursue such a claim), the homeowner may claim as a loss all unreimbursed amounts paid during the taxable year. If the taxpayer is seeking or intends to seek reimbursement, the claim for loss is limited to 75% of the unreimbursed amounts paid during the taxable year. A taxpayer with a claim for reimbursement may have income or an additional deduction in subsequent taxable years depending on the outcome of the claim. Claims remain subject to the dollar thresholds and percentages of Adjusted Gross Income otherwise applicable to casualty losses.
The Revenue Procedure provides a “safe harbor” avenue for relief allowing homeowners to potentially deduct losses that otherwise would not meet the criteria of the casualty loss rule. Affected homeowners should consult with qualified tax advisors for additional information.