Over the past few years, there has been a lot of talk regarding corrosive drywall that was imported from China in the mid-2000’s. Much of this drywall was installed in homes between 2005 and 2006 during the building boom. As of January 2011, the U.S. Consumer Produce Safety Commission (CPSC) has received nearly 3,800 reports of corrosive drywall in buildings in more than 40 states and U.S. territories. This corrosive drywall emits hydrogen sulfide gas, which can cause the blackening and corrosion of copper wiring, copper appliances and air conditioning coils. In addition, residents of homes where it is present say it also causes health problems including headaches, throat discomfort and skin irritations.
Due to the restrictions in the casualty loss rules, many homeowners and tax preparers have had questions regarding the deductibility of repairs. In short, a casualty loss is defined as a partial or complete destruction of property resulting from an event sudden, unexpected or unusual in nature. Since the corrosion of drywall is not sudden, it fell outside the definition. Furthermore, the rules state a taxpayer should deduct the loss in the year in which the loss was sustained. In the instance of long term corrosion, what year is that?
Luckily the IRS stepped up and addressed the issues in Revenue Procedure 2010-36 and allows a special tax treatment for “problem drywall” as identified by the CPSC. Once it has been identified, a taxpayer may deduct the amount of the repairs as a casualty loss subject to AGI limitations.
What if the taxpayer receives a reimbursement?
In the Revenue Procedure 2010-36, the IRS has set up a few rules to help the taxpayers identify his or her given situation and the appropriate steps to report.
If a reimbursement claim is pending, the taxpayer may take advantage of the safe harbor method and claim a loss for 75% of the unreimbursed amounts paid during the tax year to repair the damage. Depending on the outcome of the claim, the taxpayer may have to include in gross income the amount of recovery previously deducted or have an additional deduction in subsequent years.
If the taxpayer already has received a reimbursement for the cost of repairs in the year the loss occurred, the taxpayer cannot claim a loss.
For more information on corrosive drywall, including contact information and how to report a potential hazard, contact the U.S. Consumer Product Safety Commission or find them online at http://www.cpsc.gov/info/drywall/index.html.
Kathryn Wright, C.P.A.