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IRS extends safe harbor for taxpayers with pyrrhotite damage to home foundations

IRS has modified an earlier Revenue Procedure, which provided a safe harbor that allowed taxpayers to treat certain amounts paid to repair concrete foundations that were deteriorating prematurely from the presence of pyrrhotite as casualty losses, to extend the time for individuals to pay to repair these damages. As modified, for damage resulting prior to 2018, a taxpayer can now qualify for the safe harbor if he or she pays to repair the damage prior to the last day for filing a timely amended return for the 2017 tax year.

Facts. Residents in the northeastern part of the U.S. have reported problems with certain residential concrete foundations that contain pyrrhotite, which oxidizes in the presence of water and oxygen, leading to the formation of expansive mineral products and causing concrete to deteriorate prematurely.

IRS has received inquiries about: whether a loss resulting from a deteriorating concrete foundation constitutes a deductible casualty loss; the tax year any such loss would be deductible; and how the amount of the loss would be computed.

Background on casualty loss deductions. Taxpayers generally are allowed to deduct losses sustained during the tax year that are not compensated by insurance or otherwise. (Code Sec. 165) For personal-use property (such as a taxpayer’s personal residence and household appliances), Code Sec. 165 limits an individual’s deduction to losses arising from fire, storm, shipwreck, or other casualty, or from theft. A casualty is damage, destruction, or loss of property that results from an identifiable event that is sudden, unexpected, and unusual. Damage or loss resulting from progressive deterioration of property through a steadily operating cause is not a casualty loss. (Matheson v. Comm., (CA 2 1931) 10 AFTR 945)

A casualty loss is allowed as a deduction only for the tax year in which the loss is sustained. However, if the taxpayer has a claim for reimbursement of the loss (from insurance or otherwise) for which there is a reasonable prospect of recovery, no portion of the loss is deductible until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. (Reg. § 1.165-1(c)(4))

The amount of a taxpayer’s casualty loss generally is the decrease in the fair market value of the property as a result of the casualty, limited to the taxpayer’s adjusted basis in the property. (Reg. § 1.165-7(b))

Two limitations apply to casualty loss deductions for personal use property. (Code Sec. 165(h)) First, a casualty loss deduction is allowable only for the amount of the loss that exceeds $100 per casualty. Second, the net amount of all of a taxpayer’s casualty losses (in excess of casualty gains, if any) is allowable only for the amount of the losses that exceed 10% of the taxpayer’s adjusted gross income (AGI) for the year.

Earlier safe harbor. In view of the unique circumstances described above, IRS concluded that it was appropriate to provide a safe harbor method that treats such damage as a casualty loss and provided a formula for determining the amount of the loss. Accordingly, for an individual taxpayer who pays to repair damage to that taxpayer’s personal residence caused by a deteriorating concrete foundation that contains the mineral pyrrhotite, IRS will not challenge the taxpayer’s treatment of damage resulting from a deteriorating concrete foundation as a casualty loss if the loss is determined and reported as provided in Rev Proc 2017-60, 2017-50 IRB 559 (see Weekly Alert ¶  24  11/30/2017).

To claim a casualty loss under the safe harbor in Rev Proc 2017-60, a taxpayer was generally required to have paid to repair damage caused by a deteriorating concrete foundation before Jan. 1, 2018. For more details on Rev Proc 2017-60, see Weekly Alert ¶  24  11/30/2017.

New guidance provides extended date. In Rev Proc 2018-14, IRS has determined that in view of the unique hardships caused by the extensive repairs necessary to remedy the deteriorating concrete foundations and the comments received expressing concern that taxpayers need additional time to make the repairs, it is appropriate to modify the safe harbor in Rev Proc 2017-60 to extend the time for individual taxpayers to pay to repair the damage to their personal residences.

Under Rev Proc 2018-14, IRS modified the safe harbor to provide that, for damage resulting prior to 2018, a taxpayer can now qualify for the safe harbor if he or she pays to repair the damage prior to the last day for filing a timely amended return for the 2017 tax year. Specifically, Rev Proc 2018-14, Sec. 4.01 provides that:

…if a taxpayer pays to repair damage to that taxpayer’s personal residence caused by a deteriorating concrete foundation during the taxpayer’s 2016 tax year or earlier, the taxpayer may treat the amount paid as a casualty loss on a timely amended return for the tax year of payment;
…if a taxpayer pays to repair the damage during the taxpayer’s 2017 tax year or prior to a timely filed (including extensions) original income tax return for the 2017 tax year, the taxpayer may treat the amount paid as a casualty loss on the taxpayer’s original 2017 income tax return (or a timely filed amended return for the 2017 tax year); and
…if a taxpayer pays to repair the damage after filing an original 2017 income tax return and prior to the last day for filing a timely amended return for the 2017 tax year, the taxpayer may treat the amount paid as a casualty loss on a timely filed amended return for the 2017 tax year. (Rev Proc 2018-14, Sec. 4.01)

References: For casualty losses, see FTC 2d/FIN ¶  C-7214; United States Tax Reporter ¶  1654.300.

Rev Proc 2018-14, 2018-9 IRB

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