To compound the woes of the real estate market, a product known as Chinese drywall appeared during the real estate boom. Chemicals within the drywall proved corrosive to copper pipes and wiring within the wall cavities. In order to remedy this situation, all of the drywall had to be removed from the interior walls and the wiring and plumbing replaced. Unfortunately, many of the homes were worth less than what their purchase price reflected, making it impossible for homeowner to borrow funds to make home improvements. Does a reduction in the home’s value qualify as a casualty loss for income tax purposes?
Under a literal reading of section 108 of the tax code it would appear not. However, in a similar situation, the IRS adopted a more liberal policy regarding hurricane damage from Katrina, Rita, and Wilma. The service actually allowed an income tax deduction for the diminution in value of the damaged homes. As of yet, the IRS has not adopted a similar policy vis a vis corrosive drywall.
In a 2010 document, the IRS mandates that a taxpayer remediate the damage before claiming a tax deduction for a casualty loss. In other words, the taxpayer must spend money to correct the problem before the loss is deductible. This is an impossible burden for many homeowners affected by this dilemma. They simply do not have the funds to make the necessary repairs. In effect, they need the benefit of the tax deduction in order to procure the funds to make the repairs. Perhaps the IRS will reconsider its current policy regarding Chinese drywall.
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