Chinese Drywall Relief Provided to Homeowners by IRS

The IRS announced last week that homeowners who have suffered losses due to defective drywall from China can qualify for special tax deductions.

The announcement came in a letter to Senator Jim Webb, which was sent in response to a recent inquiry by Webb and other lawmakers seeking clarification on whether thousands of homeowners may qualify for Chinese drywall tax relief. The defective drywall has been found to emit corrosive gases that fill homes with a sulfur-like smell, erode and damage electrical equipment and appliances, and is suspected of causing some health problems for residents.

Internal Revenue Service Associate Chief Counsel George J. Blaine told Webb that homeowners affected by the Chinese drywall problems can qualify for casualty loss deductions not compensated by insurance if the Environmental Protection Agency (EPA) and the U.S. Consumer Product Safety Commission (CPSC) investigation confirm the reports of fumes, chemical emissions and damages that have been characteristically attributed to the material.

Blaine said in the letter that the amount of Chinese drywall relief would be the difference between the fair market value of the home immediately before and after the damage, limited to the adjusted basis of the home. Secondary costs, such as staying at a hotel while the drywall is being replaced, are not deductible. There are also limitations to the timing and amount of the deductions, as listed in the IRS Publication 547, Casualties, Disasters and Thefts.

Chinese-manufactured drywall came into the U.S. in large amounts between 2004 and 2007 due to a domestic shortage during the peak of the housing boom. The drywall, made from waste material from coal-fired plants, has caused a number of issues for homeowners in recent years, hitting especially hard in the southeastern United States.

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.