A Tax Break for Defective Drywall

The IRS is offering some relief for taxpayers with defective imported drywall in their homes. Drywall produced in China has been linked to a rotten egg smell and corroded metal components in homes across the U.S. The Consumer Product Safety Commission (CPSC) has received nearly 4,000 reports from residents in 39 states about problem drywall.

The IRS is allowing homeowners to treat damages from the drywall as a deductible casualty loss. A casualty loss deduction is generally the total of your unreimbursed loss reduced by $100 ($500 for 2009) and further reduced by 10% of your adjusted gross income. You have time itemize to claim a casualty loss.

Here's how it works:

--Damages had to occur from imported drywall installed in homes between 2001 and 2009.

--To be considered "corrosive," drywall must meet the CPSC's two-step identification method.

--Taxpayers can claim unreimbursed amounts paid to repair damage to their homes or appliances as a casualty loss.

--The loss must be claimed for the year payments were made. Taxpayers who already filed a return for that year have three years to file an amended return.

--If a taxpayer has a pending insurance claim (or plans to seek reimbursement), the taxpayer may claim a loss for 75% of the unreimbursed amount paid.

--Taxpayers who have been fully reimbursed for repairs may not claim a loss.

Here's an example of how the deduction works: Say you paid $10,000 in 2009 for the drywall repairs, none of which was reimbursed by insurance. You reduce that amount by $500 to get $9,500. Then reduce that amount by 10% of your adjusted gross income. If your AGI is $75,000, 10% is $7,500. You’d subtract $7,500 from the $9,500 to get $2,000. You can deduct $2,000.

For more information about claiming drywall damage as a casualty loss, see Revenue Procedure 2010-36.

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