On September 30, 2010 the Internal Revenue Service has sent out notification that they are stepping in with some financial relief regarding defective drywall that was imported from China and installed between the years of 2001 thru 2009. The problem appears to be that the sulfur content in the gypsum of the drywall is far too excessive and emits a sulfur dioxide gas that permeates anything made of copper in your home, (wiring, piping and electrical appliances). This in turn creates copper sulfide on the wire or pipe and the corrosion process begins. In addition but far more serious, is the sulfur gas vapors(rotten egg odor) that is released into the atmosphere of the home and in many cases has caused severe headaches, nausea and even vomiting in homeowners.
Prior to this ruling, the many homes throughout the United States that were impacted by this corrosive Chinese drywall, left homeowners with nowhere to turn for financial assistance in repairing their homes. Homeowners found their only recourse was to file class action lawsuits against their builders, drywall installers and the wholesale distributors. Ultimately the responsibility will fall squarely on the shoulders of the builder, and it will be up to him to recover his losses from the drywall install companies.
It was reported that the federal government encouraged lenders to suspend mortgage payments and tax authorities to reduce property taxes on damaged homes. This news should be welcomed help by homeowners, but does not answer the question, how are they going to pay the thousands of dollars necessary to repair their homes. Many homeowners did not find any relief, having to pay their mortgage as well as rent for another home, were forced to abandon their homes.
It was originally reported that more than 6000 homes were affected, but as of the August 2010 a status report of the U.S. Consumer Product Safety Commission, only 3,526 incident reports were received by the Commission regarding drywall problems covering 38 states. The hardest hit states seem to be Florida, Alabama, Louisiana, Mississippi and Virginia.
This new procedure by the IRS will allow you to treat damages from corrosive drywall and write them off as a casualty loss in the year of payment. Anyone who has paid for repairs in their previous tax years may also file amended tax returns for those years. In addition, losses that were incurred during the sale of your home due to this corrosive drywall may also attempt to recoup those losses.
Revenue Procedure 2010-36 will provide the following relief:
- Individuals who pay to repair damage to their personal residences or household appliances resulting from corrosive drywall may treat the amount paid as a casualty loss in the year of payment.
- Taxpayers who have already filed their income tax return for the year of payment generally have three years to file an amended return and claim the deduction. The amount of a loss that may be claimed depends on whether the taxpayer has a pending claim for reimbursement (or intends to pursue reimbursement) of the loss through property insurance, litigation or otherwise.
- In cases where a taxpayer does not have a pending claim for reimbursement, the taxpayer may claim as a loss all unreimbursed amounts paid during the taxable year to repair damage to the taxpayer’s personal residence and household appliances resulting from corrosive drywall.
- If a taxpayer does have a pending claim (or intends to pursue reimbursement), a taxpayer may claim a loss for 75 percent of the unreimbursed amount paid during the taxable year to repair damage to the taxpayer’s personal residence and household appliances that resulted from corrosive drywall.
If you are a taxpayer who has been fully reimbursed before filing a return for the year the loss was sustained, you may not claim a loss. If you are a taxpayer and you have a pending claim for reimbursement (or intends to pursue reimbursement) you may still file for additional losses as a deduction in subsequent taxable years, although it will depend upon on the actual amount of reimbursement you will received.
There is a two step identification method that you will need to follow when you file your return, it is published by the CPSC and the Department of Housing and Urban Development in their interim guidance dated January 28, 2010.
This construction defect problem will ultimately be decided in the court system. Since you will likely claim thousands of dollars in losses, it is advised to contact a tax professional to assist you with the paper work that will be evolved in order to maximize your claim.