WWYD (What wuld you do?)

[susieq]

Client had to pay over $10,000 to a contractor to realign his family room (attached to the back of his house) by jacking it up and putting something under the room to keep it in alignment. All of a sudden they could not lock their windows or open the doorwalls. The room had become separated from the rest of the home causing a break in the brick.

The explanation for this condition was "it was due to drought". Several other homes in the neighborhood had the same problem. The ground in the neighborhood must have been dried out and the houses shifted. Homeowner's insurance did not cover and tp got stuck with the expense.

Could this be a casualty loss ?

[OldJack]

The explanation for this condition was "it was due to drought" is only speculation and would not meet the sudden aspect of a casualty loss. The fact that homeowners insurance would not pay a claim is another indication that this was probably not something that could be proved or would qualify as a casualty loss.

[Snaggletooth]

Suddenness

Susie, the "suddenness" of a casualty has been upheld again and again -- meaning a cause taking place over several months or years would disqualify it from being a casualty deduction.

Interesting story, though. Didn't know that could happen due to drought.

[jainen]

claim the casualty loss

>>The fact that homeowners insurance would not pay a claim....<<

I take a different view. Living in earthquake country as I do, I can assure you that insurance companies don't pay for earth movement. This collapse was apparently related to ground subsidence caused by loss of the water table.

Even though the property settled over a period of weeks or months, I would call that "sudden" enough and advise the client to claim the casualty loss.

[TMI Moderator]

From TheTaxBook, page 4-21, under "Nondeductible [casualty] expenses:"

"Personal use property losses caused by droughts. Exception: Severe drought damage may cause a casualty when it damages the foundation of a building. (Stevens, TC Memo 1984)"

[OldJack]

This collapse was apparently related to ground subsidence caused by loss of the water table.

Even though the property settled over a period of weeks or months, I would call that "sudden" enough and advise the client to claim the casualty loss.

I would expect that you could NOT claim the loss if for no other reason than the requirements of "proof".

Progressive deterioration.
• Most losses of property caused by
droughts. To be deductible, a drought-re-
lated loss generally must be incurred in a
trade or business or in a transaction en-
tered into for profit.

Casualty loss proof.
For a casualty loss, you
should be able to show all the following.
• The type of casualty (car accident, fire,
storm, etc.) and when it occurred.
• That the loss was a direct result of the
casualty.
• That you were the owner of the property,
or if you leased the property from some-
one else, that you were contractually liable
to the owner for the damage.
• Whether a claim for reimbursement exists
for which there is a reasonable expecta-
tion of recovery.

[jainen]

&quot;all of a sudden&quot;

>>you could NOT claim the loss if for no other reason than the requirements of "proof"<<

How much proof do you need? The cost of repair is clear, and it is easy to extend that to loss of FMV since any buyer would of course notice that the doors don't open. You can't say that $10,000 bought them extravagant upgrades. A contractor identified the problem, which was common in the neighborhood and consistent with obvious weather conditions. The insurance company confirmed the cause too. Although the drought was a gradual process, the partial collapse of the building was unexpected and happened "all of a sudden."

[OldJack]

>>Although the drought was a gradual process, the partial collapse of the building was unexpected and happened "all of a sudden."<<

No one confirmed the cause was a drought and that is the proof that is needed. Houses settles/earth shifts for many reasons and just because the area had a drought when the taxpayer's doors stuck is no proof that the drought caused the problem. The contractor probably simply states the problem was earth changes and here is what it will cost to fix. The insurance company simply said they see nothing for a claim as the foundation sinking was not covered in the policy.

Where is the proof that a sudden casualty has occurred. There may be something "obvious" about the weather, but there is nothing "obvious" about why the foundation sunk as it was not sudden or the taxpayer would have an exact "date" of the event.

Review the first 2 item of proof needed per the quote from pub 547 and tell us what the proof is in this case:

Casualty loss proof.
For a casualty loss, you
should be able to show all the following.
• The type of casualty (car accident, fire,
storm, etc.) and when it occurred.
• That the loss was a direct result of the
casualty.

[oceanlovin'ea]

Shifting sinkhole

THe elderly lady that lives across the street from me noticed about 3 months ago that she had several holes in her backyard that seemed very deep. She also had some blocks cracking on the back corner of her house. She called the insurance company and told them and they sent an adjuster out to check it out. He determined there were about 3 or 4 holes that were deeper than he could measure, but not large in diameter. Then he called in another company that had equipment that could measure the depth of the holes and how many were in her yard.

The report came back that is is called a sifting sinkhole. The house won't fall in but the sand gradually sifts down creating holes and causing the foundation to crack. She had an estimate of $59,000 to jack up the house (It is not on a cement slab) and pour concrete under the foundation to give it something solid to sit on and then put the house back down.

The insurance company doesn't want to pay it. They have cancelled her insurance as of February 1st. She only paid $45,000 for the house when she bought it and doesn't have the money to fix it.

She can't sell the house. She could sell the land but what good would it do anyone to buy it.

She doesn't file tax returns any more so no discussion about casualty loss for her. But a sad situation.

Linda F