In Revenue Procedure 2017-60 the IRS has provided a safe harbor for use by individuals who have suffered damage to their personal residences due to deteriorating concrete foundations caused by the presence of pyrrhotite. Under the safe harbor, amounts paid to repair such damage will count as a casualty loss in the year of payment.
The issue affects residents of the Northeastern United States due to the presence of pyrrhotite in the concrete mixture used to pour the affected foundations. The IRS notes that this is a mineral that naturally occurs in stone aggregate which is used to produce concrete. The mineral oxidizes in the presence of water and oxygen, leading to the formation of expansive mineral products and causing the concrete to deteriorate prematurely.
Taxpayer who pay for repairs for such a “deteriorating concrete foundation” may elect to use the safe harbor and treat the amount of the payment as a casualty loss in the year paid.
The Revenue Procedure provides the following details on what must be true for a taxpayer to qualify to use this procedure.
A taxpayer who pays to repair damage to that taxpayer's personal residence caused by a deteriorating concrete foundation may treat the amount paid as a casualty loss in the year of payment. For purposes of this revenue procedure, the term “deteriorating concrete foundation” means a concrete foundation that is damaged as a result of the presence of the mineral pyrrhotite in the concrete mixture used to pour the foundation. The safe harbor under this revenue procedure is available to a taxpayer who has obtained a written evaluation from a licensed engineer indicating that the foundation was made with defective concrete, and has requested and received a reassessment report that shows the reduced reassessed value of the residential property based on the written evaluation from the engineer and an inspection pursuant to Connecticut Public Act No. 16-45 (Act). The safe harbor also is available to a taxpayer whose personal residence is either in Connecticut or outside of Connecticut, provided the taxpayer has obtained a written evaluation from a licensed engineer indicating that the foundation was made with defective concrete containing the mineral pyrrhotite.
Note that it is key that the taxpayer obtain the written evaluation from a licensed engineer to take advantage of this safe harbor.
The procedure goes on to describe the following limitations on the loss claimed:
The amount of a taxpayer's loss resulting from the deteriorating concrete foundation is limited to the taxpayer's adjusted basis in the property. In addition, the amount of the loss may be limited depending on whether the taxpayer has a pending claim for reimbursement (or intends to pursue reimbursement) of the loss through property insurance, litigation, or otherwise. A taxpayer who does not have a pending claim for reimbursement, and who does not intend to pursue reimbursement, may claim as a loss all unreimbursed amounts (subject to the adjusted basis limitation) paid during the taxable year to repair damage to the taxpayer's personal residence caused by the deteriorating concrete foundation. A taxpayer who has a pending claim for reimbursement, or who intends to pursue reimbursement, may claim a loss for 75 percent of the unreimbursed amounts paid during the taxable year to repair damage to the taxpayer's personal residence caused by the deteriorating concrete foundation. A taxpayer who has been fully reimbursed before filing a return for the year the loss was sustained may not claim a loss. A taxpayer who has a pending claim for reimbursement, or who intends to pursue reimbursement, may have income or an additional deduction in subsequent taxable years depending on the actual amount of reimbursement received. See § 1.165-1(d).
A taxpayer electing to use the safe harbor must indicate the election on his/her tax return, as detailed below:
A taxpayer claiming a casualty loss under this revenue procedure 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 § 165(h)(1) and the 10-percent-of-AGI limitation imposed by § 165(h)(2).
Taxpayers do not have to use the safe harbor method—but the Revenue Procedure reminds taxpayers who may believe they want to go another route of the general rules that they would have to demonstrate compliance with:
Taxpayers who choose not to apply the safe harbor treatment provided by this revenue procedure are subject to all of the generally applicable provisions governing the deductibility of losses under § 165. Accordingly, these taxpayers must establish that the damage, destruction, or loss of property resulted from an identifiable event that is sudden, unexpected, and unusual, and was not the result of progressive deterioration through a steadily operating cause. See Rev. Rul. 72-592, 1972-2 C.B. 101; Matheson v. Commissioner, 54 F.2d 537 (2d Cir. 1931). These taxpayers also must prove that the loss is properly deductible in the taxable year claimed by the taxpayer and not in another year. Further, these taxpayers must prove the amount of the claimed loss and must prove that no claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery.
The procedure is effective for tax returns (including amended returns) filed after November 21, 2017.