United States

IRS extends time to pay for concrete damage from pyrrhotite

TAX ALERT  | 

The IRS issued Rev. Proc. 2018-14, modifying Rev. Proc. 2017-60, to extend the amount of time individuals have to pay to repair damages to their personal residences due to deteriorating concrete foundations caused by the presence of the mineral pyrrhotite. The IRS provided the extension due to concerns it had received regarding the extensive nature of the repairs that were required.  

Rev. Proc. 2017-60 provided taxpayers a safe harbor to treat amounts paid to repair damages to their personal residences as casualty losses in the year of payment. Under Rev. Proc. 2017-60, taxpayers were able to claim losses for payments made before Jan. 1, 2018.

Rev. Proc. 2018-14 made the following modifications:

  • If a taxpayer makes repair payments during the taxpayer’s 2016 taxable year or earlier, the taxpayer may treat the amount paid as a casualty loss on a timely amended tax return (Form 1040X) for the taxable year of payment.
  • If a taxpayer makes repair payments during the taxpayer’s 2017 taxable year or prior to a timely filed (including extensions) original tax return (Form 1040, 1040A or 1040EZ) for the 2017 taxable 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 Form 1040X for the 2017 taxable year).
  • If a taxpayer makes repair payments after filing an original 2017 income tax return and prior to the last day for filing a timely Form 1040X for the 2017 taxable year, the taxpayer may treat the amount paid as a casualty loss on a timely filed Form 1040X for the 2017 taxable year.

Rev. Proc. 2018-14 is effective for tax returns (including amended returns) filed after Nov. 21, 2017.

The safe harbor is available to taxpayers who received a written evaluation from a licensed engineer confirming the foundation was made with defective concrete and received a reassessment report showing the reduced value of the property. Limitations exist when the taxpayer has a claim for reimbursement from insurance where there is a reasonable prospect of recovery. In this instance, none of the loss is deductible as a casualty loss until it can be determined with reasonable accuracy that reimbursement will not be received.

Moreover, amounts paid for improvements or additions that increase the value of the taxpayer's personal residence above its pre-loss value are not allowed as a casualty loss. Only amounts paid to restore the taxpayer's personal residence to the condition existing immediately prior to the damage qualify for loss treatment.

A taxpayer claiming a casualty loss under Rev. Proc. 2017-60, as modified by Rev. Proc. 2018-14, must report the amount of the loss on Form 4684 (‘Casualties and Thefts’) and must mark ‘Revenue Procedure 2017-60’ at the top of that form. Taxpayers are subject to the $100 limitation imposed by section 165(h)(1) and the 10-percent-of-AGI limitation imposed by section 165(h)(2).

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