Rev. Proc. 2010-36: Something Smells Foul (Again!) for Chinese Drywall Victims

Between 2003 and 2007, many homes in the US were built with Chinese drywall, which caused problems like corrosion, bad odors, and health issues for people living in those homes. The IRS issued guidance for homeowners to claim a tax deduction for the damage caused by the defective drywall, but it didn’t help everyone. The problem was first reported in Florida and Louisiana, and investigations found that the drywall was imported from China and used in homes between 2001 and 2008. Builders knew about the problem as early as 2006, and it became a big news story in 2009. Many homeowners had problems with Chinese drywall, but it wasn’t officially identified until 2010. Since then, there have been over 3,800 reports of bad drywall in 43 states. Some homes just need a few boards removed, but most need to be completely redone, costing hundreds of thousands of dollars. Florida has taken steps to help affected homeowners. The government rejected Florida’s request for help with damage from corrosive drywall, saying it didn’t meet the rules. Later, the IRS said homeowners could get a tax break for fixing the damage, but only if they paid for it themselves. This is different from how the IRS helped homeowners after other disasters like hurricanes, where they could get a tax break for the damage without having to pay for the repairs themselves. The government gave a lot of help to hurricane victims in 2004 and 2005, but not to people affected by bad drywall. If you want to get a tax deduction for the damage from bad drywall, it’s a lot harder and you have to prove a bunch of stuff. It’s not fair because the hurricane victims got more help. If you experience a loss of personal property that is not covered by insurance, you may be able to deduct it on your taxes. The loss must be caused by a sudden and unexpected event, like a fire, storm, theft, or other unforeseen circumstances. Court cases have set guidelines for what qualifies as an “other casualty” loss, and the damage must be unusual and outside of your normal activities. You can only deduct the amount of the loss that is not reimbursed and there are limits on how much you can deduct. If you have a corrosive drywall problem, it may also qualify for a casualty loss deduction if it meets the necessary criteria. The process of installing defective drywall in homes can take days or weeks, and it causes a lot of damage. Even though the damage happens over time, the event that caused it is when the drywall was installed or when the home was purchased. This is like a natural disaster because it affects so many people and causes a lot of financial loss. The damage from the defective drywall is like a silent disaster that has cost billions of dollars and has forced many people to leave their homes. The IRS has made it easier for homeowners with defective drywall to claim a tax deduction for the damage. They have provided a safe harbor method for calculating the loss. If homeowners choose to calculate the loss outside of this method, they need to prove that the damage was sudden, unexpected, and not the result of gradual deterioration. The amount and timing of the loss can also be tricky to figure out, but the IRS may argue that it should be based on the home’s value at the time the damage was discovered. However, this could result in a smaller deduction for many homeowners. If homeowners argue that the loss should be based on the home’s value at the time of purchase and the cost to fix it at that time, they could get a bigger deduction. Homeowners who discovered defective drywall in their homes faced a tough decision when it came to deducting the cost of fixing the problem on their taxes. The method of valuing the loss had its problems, and many homeowners couldn’t afford to pay for the repairs right away. The decrease in home value due to the real estate market also made it difficult to measure the loss. In order to take a tax deduction, homeowners had to wait to see if they would get any reimbursement for the cost of the repairs. This could come from insurance companies, through a lawsuit against the home builders and drywall manufacturers, or through negotiations with a lender. Until they knew for sure, they had to wait to take the deduction on their tax returns. In simple terms, the law says that theft includes more than just stealing things. It can also include tricking or deceiving someone to take their property. For example, if a builder sells a house without telling the buyer about a serious problem, like toxic drywall, it could be considered theft. This could qualify the buyer for a tax deduction for their loss. This is important because it means the buyer could get more money back for their loss. It’s like how victims of Ponzi schemes can get relief for their losses. The IRS has provided some help for people affected by bad drywall through Rev. Proc. 2010-36, but it’s not as much help as they gave to hurricane victims or people affected by Ponzi schemes. It’s confusing why they’re not giving more help, especially since so many people are affected. Insurance companies won’t pay for the damage, so maybe that’s why the government isn’t giving more help. The first few points mention government agencies and documents related to identifying homes with problem drywall, which can cause health issues. The next points refer to IRS regulations and court cases about deducting losses from property damage on tax returns. It also includes information about insurance claims related to problem drywall. This article provides updates on the damage caused by Chinese drywall in the United States. It also discusses tax regulations related to claiming property damage as a deduction. The authors are Robert L. Spallina and Lauren A. Galvani from a law firm in Boca Raton. The article is submitted on behalf of the Tax Section.

Source: https://www.floridabar.org/the-florida-bar-journal/rev-proc-2010-36-something-smells-foul-again-for-chinese-drywall-victims/