The Internal Revenue Service (IRS) recently released a revenue procedure that allows taxpayers to take a deduction related to repairs on the foundation of their personal residence due to faulty concrete. Concrete mixed with the mineral pyrrhotite was recently found to be faulty, which is causing homeowners to pay for costly repairs to fix cracks and their crumbling foundations.
The IRS issued a safe harbor under Revenue Procedure 2017-60, which provides that taxpayers will not be challenged for deductions if certain criteria are met. The taxpayer must obtain a written evaluation from a licensed engineer stating that the concrete contains pyrrhotite. Repairs to the foundation are limited to personal residences and cannot increase the value of the home beyond the pre-loss value.
The amount of the deduction is dependent on a few factors. First, the loss is limited to the adjusted basis of the home. The amount of the loss is also dependent on if you receive, or will receive, reimbursement from your homeowner’s insurance company or pursue litigation. If you claim a loss deduction and receive future reimbursements or proceeds, you must include those amounts in your income in the year received.
When placing a claim through insurance or pursuing litigation, the deduction is limited to 75 percent of the cost in the year incurred. If you receive future payments that reimburse the losses, you must claim those amounts in income in the year received. By not receiving any reimbursement you can claim an additional deduction in the year that it is determined you will receive no future benefit.
The casualty loss rules still apply to any taxpayer using this safe harbor to take deductions. Taxpayers must first reduce the loss by $100. Then the loss is further disallowed until it exceeds 10 percent of adjusted gross income of the taxpayer. To claim the loss the taxpayer must fill out Form 4684 with “Revenue Procedure 2017-60” on the top of the form. The loss then carries to Schedule A, and is taken as an itemized deduction subject to the limits mentioned earlier. If the taxpayer chooses not to use this safe harbor, the burden of proof is now on the taxpayer to prove that the deductions qualify under the casualty loss rules and are subject to further scrutiny by the IRS.