October 4, 2010 12:00 am

Casualty Loss for Repairs Due to Chinese Drywall

Certain imported drywall (much of which comes from China and is referred to as Chinese drywall) has caused blackening or corrosion of electrical wiring and copper components in household appliances, as well as sulfur gas odors in homes in numerous states. Last year, the Consumer Product Safety Commission determined that the imported drywall caused the damage and odor. Now the IRS has provided some relief to affected homeowners.

The IRS has now recognized that the damage to the homes from the installation of the imported drywall is a casualty event that may give rise to a tax deduction.

Deductible amounts

When is the tax loss? Homeowners who repair the damage to their homes and/or household appliances can treat the cost as a casualty loss in the year of payment. Those who have already made repairs and filed returns for prior years have 3 years in which to file amended returns to claim a tax refund.

What is the tax loss? The amount of the deduction depends on whether a homeowner is still seeking reimbursement from insurance or pursuing litigation.

  • If there is no pending claim, then all unreimbursed costs for repairs are the amounts used to figure the casualty loss. If, for example, the repairs were made in 2009, then the loss (the repair costs) have to be reduced by $500; only the net amount of all casualty and theft losses in the year in excess of 10% of adjusted gross income is deductible.
  • If there is a pending claim, under an IRS safe harbor, a homeowner can treat 75% of the cost of repair as the amount used to compute the casualty loss in the year of payment. The homeowner does not have to wait to resolve the pending claim before claiming some tax relief.

Which drywall qualifies? There is a two-step identification method published by the Consumer Protection Safety Commission and the Department of Housing and Urban Development found at www.cpsc.gov/info/drywall/InterimIDGuidance012810.pdf.

Source: Rev. Proc. 2010-36

Tax Glossary

Constructive receipt

A tax rule that taxes income that is not received by you but that you may draw upon.

More terms