TAX - Relief for Homeowners Who Suffered Losses from Hazardous Imported Drywall Installations

In recent years some of the building materials imported from abroad turned out to be hazardous in nature. That in turn led to big losses to the construction industry and the home owners. These building products were installed during the years 2001 to 2008. Most of those, if not all of them, originated from China. Since drywall materials were prominent among those products, the incriminating products came to be called by the general name,"Chinese drywall,"though, for political correctness government agencies refer to them as just imported dry wall installations.

The homeowners noted the following after installation:

- blackening or corrosion of electrical wiring
- similar changes in copper components in household appliances like air conditioning units. That needed frequent replacement of some parts
- smell of "rotten eggs" or sulfur gas in homes
- increase in health concerns including irritation and itching in eyes and on skin, difficulty in breathing, persistent cough, running or bloody noses, repeated headaches, sinusitis, and asthma attacks.

Though complaints were just a trickle initially, the problem assumed mammoth proportions encompassing many states. So in 2009, government decided that real hazard existed. The Consumer Product Safety Commission (CPSC) and Department of Housing and Urban Development (HUD) conducted an investigation supported by state agencies.

Investigators did indoor air studies on a representative sampling of 51 homes spread over four states. They determined that the imported drywall did cause the corrosive damages and that it also was the source of the odor-causing hydrogen sulfide.

At the time of writing, CPSC has received reports of 3650 incidents spread over 39 states, 3 listed as unknown. Southeastern states account for nearly 92% of them:

Florida - 2097, Louisiana - 683, Missouri - 237, Alabama - 203, Virginia - 153.

The rest of the incidents are:

Texas - 36,
California and Georgia - 33 each,
North Carolina - 27,

New York and Washington - 10 each,
Arizona and Tennessee - 9 each,
Indiana and Maryland - 8 each,
Kentucky - 7,
Ohio, Pennsylvania - 6 each,

District of Columbia, Ohio and Pennsylvania - 5 each,
Kansas, Oklahoma, South Carolina, Wisconsin - 4 each,
Arkansas, Connecticut, Delaware, Minnesota, West Virginia - 2 each
Maine, New Mexico, Rhode Island, South Dakota, Vermont, Wyoming, American Samoa and Puerto Rico - 1 each.

More incidents happened in Southeast because of the unprecedented spurt in repair and rebuilding activities in the region during 2006-2007 in the aftermath of the vicious hurricanes in 2004 to 2005.

Now the Internal Revenue Service (IRS) has stepped in to help those who suffered losses from these faulty building materials. There are already provisions for claiming tax relief for certain casualty losses. Losses from these specific batches of imported dry wall has been added to those.

Of course, like any other specific situations there are some conditions to be met to make sure that only those who really suffered from these specific products get these tax deductions.

Qualifying a drywall as faulty - identifying the hazard

Since corrosive changes normally can happen in metallic building materials over many years, Consumer Protection Safety Commission and the Department of Housing and Urban Development had issued special guidance in identifying them in these supposedly new products. They advised a two-step process:

1. Initial Threshold Inspection 2. Inspection for Corroborating Evidence.

The first step is a prerequisite for the second step.

1) The initial threshold inspection looks for

- visible changes of metal corrosion and
- evidence for installation of drywall during the relevant years (2001-2008).

Documentation of:

-replacement of evaporator coils due to blackened corrosion causing failure
-installation of new drywall in new construction or renovations dated between 2001 and 2008

should come handy for homeowners at this stage.

2) Inspection for Corroborating Evidence.

Once the result are positive for those two conditions, the second step starts. But the process is different for those installations during 2001-2004 years and those done during 2005-2008.

-For installations done in 2001-2004 period at least 4 of the following six conditions need to be met.
-For those installation done later, in 2005-2008, only 2 of these corroborative conditions are required.

Some of these corroborative evidences involves professional testing in analytical laboratories:

(a) Corrosive changes inside the home, demonstrated by the formation of copper sulfide on metal test strips (copper and silver coupons) placed in the home for a period of 14 days to 30 days
OR
confirmation of the presence of sulfur in the blackening of the grounding wires and/or air conditioning coils;
(b) Confirmed manufacturer's markings of Chinese origin for drywall in the home;
(c) Strontium levels in samples of drywall core found in the home, excluding the exterior paper surfaces, exceeding 1200 parts per million (ppm);
(d) Elemental sulfur levels in samples of drywall core found in the home exceeding 10 ppm;
(e) Elevated levels of hydrogen sulfide, carbonyl sulfide and/or carbon disulfide emitted from samples of drywall from the home when placed in test chambers using ASTM Standard Test Method D5504-08 or similar chamber or headspace testing;
(f) Corrosion of copper metal to form copper sulfide when copper is placed in test chambers with drywall samples taken from the home.

Now, MORE ABOUT THE TAX RELIEF

How is the tax deduction claimed?

The loss incurred in repairing the damage is claimed as a casualty loss on Form 4684 ("Casualties
and Thefts").

Remember to mark "Revenue Procedure 2010-36" at the top of that form.

But let us not lose sight of the big picture: It has not been notified as a "federally declared disaster".

So it is still subject to the $100 limitation for years prior to 2009 ($500 for 2009). That means the first $100 ($500 for year 2009 only) will have to be reduced and thus excluded when calculating the loss.

Also, only the net amount of all casualty and theft losses in the year in excess of 10% of adjusted gross income is deductible.

What is Year of the Loss for tax purposes?

As said above, the incriminating dry walls were installed between 2001-2008 and repaired between 2001 and 2009.

The year in which the homeowner paid for the repair of the damage to their homes and/or household appliances is the year of the casualty loss for tax purposes.

Naturally, that means many taxpayers would have made those repairs in prior years but could not claim such deductions when filing returns, as no such deduction existed at that time. So those filers who had already incurred repair expense are allowed up to 3 years to file amended returns and claim a tax refund.

How much of the loss can be claimed as a tax deduction?

The amount of the deduction depends on whether a homeowner has already been full or partially reimbursed, OR is still dealing with the insurance company for reimbursement or is still pursuing litigation in the matter OR intends to do so.

• If the taxpayer has no pending claim as above, then all unreimbursed repair costs on damages caused by faulty drywall can be used to figure the casualty loss.

• If the taxpayer has a pending claim or intends to pursue reimbursement, under an IRS safe harbor, 75% of the UNREIMBURSED cost of repair can be used to compute the casualty loss. That means the homeowner can claim the loss even before the final settlement of insurance or litigation.

Can a loss which was fully reimbursed be claimed as a tax deduction?

A taxpayer who has been fully reimbursed before filing a return for the year the loss may not claim a loss.

What happens if the final reimbursement in pending claims is more or less than the figure used to compute the loss for tax purposes?

A taxpayer who has a pending claim for reimbursement or intends to pursue reimbursement at the time of filing may have

additional income
OR
additional deduction

in subsequent taxable years depending on the actual amount of reimbursement received.

Potential for confusion regarding the relevant periods 2001-2008 and 2001-2009

There can be confusion between the differing usage of the periods 2001-2008 and the 2001-2009 by the various government departments.

Federal agencies including Environmental Protection Agency (EPA) stepped in January 2009 and the use of these drywalls were stopped before that time. So the last of these installation should have happened in 2008 though repairs may have been done in 2009.

So IRS notification includes REPAIRS done in 2009 while the notifications by the SCPC and HUD stops with INSTALLATION done in 2008.

Naturally, IRS is concerned with the loss taxpayer suffered in repairing the damage while the other two departments are concerned with identifying and stopping the incriminating installations.

PLEASE NOTE: This general article is for information purposes only and does not purport to be comprehensive or authoritative. The "dry wall problem" is still under constant monitoring and testing by the Federal agencies as chances of misclassificaion abound. This is because other causes of metal corrosion and gas emission can exist in the environment beyond the dry walls . Since this is an ongoing investigation with future updates expected, the resources provided by CPSC should be consulted for the latest information and any change in guidelines. As for the latest tax information relevant to individual situation, IRS resources or a tax expert should be consulted.