IRS Declares Faulty Chinese Drywall May Qualify For Casualty Loss Deduction

In the aftermath of the devastating 2005 hurricane season that saw hundreds of thousands of homes damaged or destroyed by a succession of hurricanes and severe storms, the need to rebuilt was all too apparent and the demand for construction materials soared.

Among the products needed was drywall, and when US suppliers couldn't meet the demand, Chinese producers picked up the slack. Well, it turns out that was a bad idea for many homeowners and contractors who used the Chinese drywall. Problems, including outgassing, mold, and other assorted problems made the drywall useless and require replacement.

There are lawsuits pending against those manufacturers, but that's little comfort to those affected. The IRS has annoucned that damage caused by defective Chinese drywall will be deductible as a casualty loss if the EPA and the Consumer Product Safety Commission (CPSC) determine that the drywall is the source of unusual damage.

The CPSC has confirmed that at least 5,503,694 sheets of Chinese-manufactured wallboard were imported into the country, and expects that number to increase as investigations continue.

A recent status report by the CPSC on July 7 noted that the commission has received at least 608 incident reports from homeowners with Chinese drywall; the majority coming from Florida, Louisiana and Virginia. CPSC investigators are also concerned that the corrosion and damage to electrical wiring and appliances may constitute a fire hazard in some cases.

Many insurance companies have denied coverage for the Chinese drywall damages through homeowners’ policies, leaving homeowners in a difficult position as they are forced to pursue lengthy litigation against the foreign companies responsible for manufacturing the defective drywall, as well as suppliers, distributors, retailers and builders.

Last month, all federal Chinese drywall lawsuits were consolidated and centralized in an MDL, or Multidistrict Litigation, in the U.S. District Court for the Eastern District of Louisiana.

If the EPA and CPSC do find the problem, the amount of the casualty loss will be the difference between the fair market value of the home immediately before and immediately after the casualty, limited to the adjusted basis of the home. Costs incident to the casualty, such as having to find temporary shelter, are not deductible.