The IRS will allow individuals who have used corrosive drywall building materials to treat related losses as a deductible casualty loss. Revenue Procedure 2010-36, 2010-42 IRB provides the guidance.

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Many homeowners have experienced problems with certain imported drywall installed in their homes between 2001 and 2008. Homeowners have reported blackening or corrosion of copper electrical wiring and copper components of household appliances, as well as sulfur gas odors. In November 2009, the Consumer Product Safety Commission (CPSC) reported that an indoor air study of a sample of fifty-one homes found a strong association between the problem drywall and levels of hydrogen sulfide in those homes, as well as corrosion of metals. See http://www.cpsc.gov/info/drywall.

The IRS has received many inquiries about whether a loss from corrosive drywall constitutes a deductible casualty loss under IRC Section 165; the taxable year any such loss would be deductible; and how the amount of the loss would be computed.

Individuals generally may deduct losses incurred during the taxable year that are not compensated by insurance or otherwise. For personal-use property (such as a personal residence and household appliances), the deduction is normally limited to losses from fire, storm, shipwreck, or other casualty, or from theft. A casualty loss 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 is not a casualty loss.

A casualty loss normally may be deducted only for the taxable 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 determined with reasonable certainty whether such reimbursement will be received.

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. To simplify the computation of a casualty loss deduction, IRS regulations permit taxpayers to use the cost to repair the damaged property as evidence of the decrease in value of the property. See Treasury Reg. Section 1.165-7(b).

IRC Section 165(h) imposes two limitations on casualty loss deductions for personal use property such as a personal residence. First, a casualty loss deduction is allowable only for the amount of the loss that exceeds $100 per casualty ($500 for taxable years beginning in 2009 only). 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 ten percent of the taxpayer's adjusted gross income (AGI) for the year.

Although losses incurred from corrosive drywall is not “sudden” as normally required, in view of the unique circumstances surrounding such damage, the IRS will provide a safe harbor method (or a special tax break) that treats certain damage resulting from corrosive drywall as a casualty loss. The IRS also provided a formula for determining the amount of the loss. To qualify, see the following specific procedures.