A new procedure will allow you to treat damages from corrosive drywall and write them off as a casualty loss in the year of payment. Anyone who's paid for repair in previous tax years may file amended tax returns.
Prior to this ruling the approximately 6,300 homes impacted by corrosive Chinese drywall had nowhere to turn in most cases for any sort of financial relief from the hundreds of thousands of dollars they've paid in repairs, if they have been able to afford repairs at all. Some have just walked away from their homes.
Insurance companies haven't paid a dime. Only a few builders or communities gave homeowners any assistance. The government encouraged lenders to suspend mortgage payments and encouraged local taxing authorities to reduce property taxes on damaged homes. Yet few of these actions actually helped homeowners address the key problem -- replacing the offending drywall. Chinese manufacturers so far have argued in the U.S. Courts that they have no jurisdiction over them.
As of the August 2010 status report of the U.S. Consumer Product Safety Commission, 3,526 incident reports were received by the Commission regarding drywall problems in 38 states, the District of Columbia and Puerto Rico. Ninety percent of these reports are from five states: Florida (58 percent), Louisiana (19 percent), Mississippi (6 percent), Alabama (6 percent), and Virginia (4 percent). As part of its investigation working with state governors, county governments, importers, builders, distributors, installers and other parties in the drywall distribution chain, the combined complaints to all these sources totals about 6,300 (after eliminating duplicates). The CPSC maintains a website with up-to-date information on Chinese drywall.
Now there are some reports that some homes are impacted by American drywall. Investigations of these reports are still ongoing, but similarities are seen. While the U.S. manufacturers deny using any Chinese drywall, there is some suspicion that materials were mixed in some homes.
So what should you do to claim a loss when filing taxes?
The amount of a loss that you may claim depends upon whether you have a pending claim for reimbursement (or intend to pursue reimbursement) for the loss through property insurance, litigation or otherwise:
- If you don't have a pending claim for reimbursement, you may claim as a loss all unreimbursed amounts paid during the taxable year to repair damage from the corrosive drywall to your residence and household appliances.
- If you do have a pending claim (or intend to pursue one), you may claim a loss for 75 percent of the unreimbursed amount paid during the taxable year to repair the damage.
- If you have been fully reimbursed before filing a return for the year the loss was sustained, you may not file a claim for a loss.
- If your loss exceeds what you claim, you may be able to take an additional deduction in subsequent tax years.
The loss you will be able to claim will be based on the decrease in your property value as a result of the casualty and will be limited to your adjusted basis on the property. Regulations do allow you to use the cost to repair the damaged property as evidence of the decrease in value to your property.
You can't write off any improvements you do to the home that increase the value of the home, such as add an extra room. You can only write off the amount you paid to restore your personal residence to its condition prior to the loss.
Since you will likely claim thousands of dollars in losses, you're probably best off contacting a tax professional to assist you with the computations and forms you'll need to fill out to claim this loss.
Lita Epstein has written more than 25 books including the "Complete Idiot's Guide to Tax Breaks and Deductions."
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