Discussion:Black Mold Casualty Loss

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Discussion Forum Index --> Tax Questions --> Black Mold Casualty Loss


Waynec (talk|edits) said:

2 April 2006
New client relocated here and she sold home in Chicago for profit (100k). However, in reviewing last 3 years returns she had "black mold" in her home in 2002 which was NOT reimbursed thru insurance. She spent about 30k to rid the mold and did not take a casualty loss for this. She bought the home in 2002 for 350k and the realtors did not know/absolved themselves of any liability. Could not go back against the prior owner. Oh well! Can she amend the 2002 return for this loss at that point? And, now that the house sold how do we "prove" a loss in value? Any input would be helpful. Thank you for all your help.

HPTAX (talk|edits) said:

2 April 2006
I don't think you have to do anything. Taking a loss against the home reduces the basis. The home was sold, I believe, at its unadjusted original basis (That's where you account for the loss). She got a benefit. Not necessarily a tax benefit but a benefit. Besides, it may be too late to amend.

Riley2 (talk|edits) said:

3 April 2006
Unless your client suffered "sudden or unexpected" damage to her home while she owned the property, she is not entitled to claim a casualty loss. This usually means that the mold must be the result of a single flood or storm occurring during her period of ownership. In this case, the mold damage probably occurred prior to the period of her ownership, and no deduction is allowed.

MonroeCPA (talk|edits) said:

3 April 2006
Monday, April 03, 2006

Hello, Waynec.

The appearance of black mold in a house is a gradual process, and does not happen suddenly. The Internal Revenue Service does not categorize a gradual deterioration as a business, or nonbusiness, casualty. It must be sudden, and disaster-like, or be a theft of personal property, such as an automobile. The $ 30,000.00 spent by your client in 2002, to rid her house of black mold, is not a business, nor nonbusiness, casualty loss. Her 2002 individual income tax return is correct, as filed, and there is no need to amend it.

Waynec (talk|edits) said:

3 April 2006
Thank you for your reply. But, I should have been more clear on the circumstances. She bought the house in 2002 and after moving into it (2 mos or so) everyone was getting sick. That's when they discovered the black mold! The realtors scattered and the homeowner couldn't be held liable since he did not know. She wound up with a huge expense and related problems. I sincerely appreciate hearing from you. Thanks again. Wayne

Riley2 (talk|edits) said:

3 April 2006
I see no deductible loss here.

Sw (talk|edits) said:

3 April 2006
Looks like you would just add the $30000.00 to the cost $350,000 of the home. Basic in home now $380,000. or am I missing something.

FSauce (talk|edits) said:

18 May 2006
If everyone was getting sick, couldn't they claim a medical expense deduction, deducting costs over 7.5% of AGI. Since these repairs/improvements are not increasing the value of the home, but are to remove the source of the family's ailment, I would say that one could take a medical expense deduction... Any thought's - - anbody??

Warren (talk|edits) said:

19 May 2006
I don't think that it qualifies as a medical expense either. If I was the buyer I think I'd have hired a private investigator to find out if the sellers knew about the mold. You can bet that they knew if everyone was getting sick in buyers family. In Calif a buyer must disclose a known defect when selling real estate, I believe many states have a similar statute.

Taxref (talk|edits) said:

19 May 2006
FSauce has a good idea, but it wouldn't work in this case. The reason is that the FMV does increase due to the repair. As soon as the mold was discovered and an estimate of $30K for repairs was needed, the FMV would have dropped by the same amount. The repairs would have raised the FMV back up when they were completed.

Michaelstar (talk|edits) said:

19 May 2006
This is a major repair and I would add the $30,000 to the basis of the home. Minor repairs are not added to basis but $30K in repairs on a $350K home should not be written off. The only issue I see is that this home was a personal residence so most likely the gain would not have been taxable under sec 121 anyway had she lived in the home for at least two years of the last 5. Or if one of the many exceptions applied, there would at least be part of the $250/$500K sec 121 allowance could be utilized.

Warren (talk|edits) said:

19 May 2006
I would probably add it to basis too since the problem existed when purchased. But there is nothing that says major repairs costs can be added to basis. If this had been 10-15 years after they owned the house and the repairs were just getting the house back to where it was then there is no basis increase even though it might be costly to fix. Improvements get added to basis but repairs don't.

Michaelstar (talk|edits) said:

19 May 2006
Warren & Wayne - I do agree that repairs are not added to basis - and we both seem to agree that we would add the $30K to basis.

Reason why: When reading reg 1.162-4 - repairs - it talks about when repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the live of the property, shall either be capitalized....... The distinction between repairs and improvements is made on the basis of the type of expendure, considering all the facts and circumstances. In a case like this, I would guess that a wall or two had to be taken out and replaced, new tile added, new plaster or drywall etc. I would be agressive and not consider this type of repair incidential but note in my workpapers that it did materially add to the value of the home and appreciably prolonged the useful life of the property. I would also discuss with the client that if the transaction was audited, there is a risk of change but I would consider that risk of change even in audit to be very remote.

Hew Jackson (talk|edits) said:

5 April 2007
Has anyone seen PLR200607003, where IRS says the cost of mold remediation is deductible under Sect 162? This is for a landlord fixeing his rental property, and I would like to know how this PLR logic applies to a homeowner with same problem.

I had thought medical deduction would be the way to go, since problem was not sudden, like a bolt of lightning striking.

Sheldon (talk|edits) said:

27 August 2008
I have a client who bought a home and moved in as their personal residence. Within a day or two of moving in, they realized they had a major odor problem. It turns out that there major prior pet problems that been hidden from the realtor, inspector, appraiser, etc. They had to move out, store their items, replace the flooring, etc and then could move back in. He said they attempted some action against the seller, realtor, inspector but nothing much came of it. Seems like this should qualify as a loss, but find it difficult to classify as either a casualty or theft. Is there any other thoughts on whether there is any tax event here?

Kevinh5 (talk|edits) said:

27 August 2008
add flooring to basis

Riley2 (talk|edits) said:

28 August 2008
Not a casualty loss since the damage occurred prior to their ownership. Might be a basis for a lawsuit, but I see no relief from the taxman.

Riley2 (talk|edits) said:

28 August 2008
However, if the sellers made deliberate misrepresentations, there may be a deductible theft loss.

Sheldon (talk|edits) said:

28 August 2008
It does seem to be a case of deliberate misrepresentation by the sellers. I do not think there is a police report. The client may just have record of some discussions that took place with the realtors, insurance people and the like. So I am looking for good suggestions for minimum documentation that the client needs to be ultimately successful with it as we might go ahead with the theft angle.

CrowJD (talk|edits) said:

28 August 2008
Police report? Why, that's racial profiling. Would you file a police report on white mold? Probably not, and it's just as deadly.

Closest thing you'll get for theft civilly would be fraud, outright fruad, fraudulant concealment, that type of thing.

I would imagine you'd end up in the newspaper in the "News of the Weird" column for trying to report to the police "theft by dishonest mold leavers."

Riley2 (talk|edits) said:

28 August 2008
If there was deliberate misrepresentation, was a civil complaint alleging fraud filed?

CrowJD (talk|edits) said:

28 August 2008
It seems to be he'd have to go through the hoop of a civil suit, there's an intentionality element to fraud that would be just the ticket he needs.

Though frankly, it was a form of theft by deception, I guess you could say. If you could get them to take a report... but it could turn awful ugly if they actually got arrested.

Sheldon (talk|edits) said:

28 August 2008
Appreciate these very quick replies. I'm going to contact my client to see what documentation he has or what complaints were made already. I know that they couldn't find a way to recover anything, but haven't investigated how much they tried yet. It is on an older year, so we have the time element also, as it may be too late to file new complaints, etc.

Fitzman919 (talk|edits) said:

15 February 2009
I have a instance like the case above. I have a homeowner that had found the 3 most dangerous molds and that was verified by and industrial hygenist. That incident caused the family to have to vacate there home for over 2 months while the problem was taken care of. A claim was filed with the homeowners insurance and the damage was not covered by there determination. The homeowner got estimates for the repairs but since the repair cost were not covered by insurance the $30,000.00 estimate was beyond the means of the homeowner, so the home owner had to do all of the removal themselves. Now the question, mold is something that happens over a period of time but in the process of removing the mold damaged areas the homeowner found a active water leak in the walls that he promptly repaired. The homeowner is guessing that this leak started about 8 months prior to the detection because they can show that there water bill went up $30.00 month then. Yes they had the city come out and had people check the home for leaks and nothing was found, so they thought it was from normal usage. After the leak was repaired the water bill went back down $30.00 month. What part if any of the homeowners expenses for this repair is covered from the materials, disposal, outside of home expenses, loss of personal property due to damage, or the homeowners labor, etc. This had to be repaired to make the home livable due to unsafe levels of the mold in the home. Thanks for any guidance on this matter.

Riley2 (talk|edits) said:

16 February 2009
Where is the sudden and unexpected event? Mold is a gradual process.

RoyDaleOne (talk|edits) said:

16 February 2009
(6/1/07) Q: How will the IRS will handle water damage "mold issues" as a result of insufficient repairs or whatever the cause. Will there be special reporting on the loss related to mold?

A: Whether individuals may claim damage to their personal-use property from mold as part of a casualty loss depends on the facts and circumstances of each situation. A key factor to consider is whether the mold damage occurred as a direct result of the disaster or from some other intervening cause since there must be a causal connection between the casualty event and the loss claimed by the taxpayer. For example, individuals would not be entitled to deduct as part of their casualty loss mold damage that occurred as a result of insufficient repairs. The individuals’ casualty loss deduction would be limited to the property damage caused by the disaster. In addition, if a large amount of time lapsed between the date of the hurricanes and the formation of the mold, this raises the question of whether the mold damage was caused by the disaster or by some other factor.

The formation of mold may qualify as a separate casualty. A casualty is an event that is identifiable, damaging to property, and sudden, unexpected, and unusual in nature. An event is sudden if it is swift and precipitous, and not gradual or due to progressive deterioration of property through a steadily operating cause. An event is unexpected if it is unanticipated and it occurs without the intent of the one who suffers the loss. An event is unusual if it is extraordinary and nonrecurring, one that does not commonly occur during the activity in which the taxpayer was engaged when the destruction or damage occurred and one that does not commonly occur in the ordinary course of day-to-day living of the taxpayer. If, under a particular set of facts, the formation of mold is a sudden, unexpected, unusual and identifiable event that caused damage to the individual’s property, then it would qualify as a casualty and the individual may be entitled to deduct the loss for the resulting property damage as a casualty loss under section 165(c)(3) if the individual satisfies the other requirements for the deduction.

Examples of nondeductible, too-slow events include termite damage, carpet beetle infestation, dry-rot damage, dry well, rust, corrosion, growing plant loss, moth damage, Dutch Elm disease, erosion and mold.

Mamamia (talk|edits) said:

1 October 2009
I have a situation where taxpayer has a home that was lost in a storm. Home was repaired and several years later, taxpayer discovers the repairs made to the home were insufficient. This discovery was made when a corner of the house collapsed causing approx $100K of damage. Collapse occurred because of rot. Rot occurred because of insufficient contractor repair. Insurance will cover the cost to repair the collapse, but not the rot.

The collapse was sudden, the rot that caused the collapse was not, but the rot was caused by contractor negligence. Would that have any bearing on the deductibility of the loss caused by rot?

Kevinh5 (talk|edits) said:

1 October 2009
if there was no black mold involved, then you'll want to start a new tax discussion AFTER you've filled out your profile. Otherwise, your comment will be removed per the instructions and warnings on this site.

Burientaxman (talk|edits) said:

12 November 2009
Nothing on this thread seems to definitively answer the question whether mold removal (particularly when a homeowner becomes ill, has asthema or other breathing conditions) may be deducted as a medical expense; and, if so, any adjustments to be made for actual building improvements. And taking it one step further, what about a medical deduction for building improvements that PREVENT a repeat of the mold?

Thanks for the advice.

Scrivenerjones (talk|edits) said:

12 November 2009
Burien-- I would be reluctant to take a deduction for mold removal for two reasons.

1. As you probably know, the regs say you only get to deduct the cost of capital improvements to the extent that the cost exceeds the increase in the home's FMV. Since widespread black mold tends to take a pretty big bite out of a home's value, I suspect that removal costs would tend to be more or less offset by increase in value.

2. The argument that the mold removal's "primary purpose [was] the medical care of the taxpayer" seems pretty thin. After all, if the TP didn't have asthma or another respiratory condition, and he discovered the black mold, he would probably pay to have it removed anyway. So it would most likely be considered an ordinary capital expenditure with a secondary medical purpose, and therefore not deductible.

As to the improvements to prevent a mold outbreak, that is even trickier. There aren't any cases on point that I have found. In one case, the taxpayers were denied a deduction for an air-filtration system to mitigate asthma. However the "medical purpose" in that case was only substantiated by a note that their doctor scribbled on the back of a napkin, so if the medical necessity of the anti-mold improvements could be better documented, you might have a better chance at a deduction.

I hope this makes some sense.

Pashalaoda (talk|edits) said:

April 7, 2014
What about the black mold as an effect?

That is, the precipitating event is an unusual deluge of 13" rain in one day (average annual rainfall is 46.3"). That is the sudden, unexpected cause of the "river" flowing under the house and into the vents, saturating everything, especially the pressboard ductwork. Two months later firing up the furnace reveals the presence of the black mold, the outcome (or sequelae, if you will) of the sudden, unexpected event. Client owned property for several years already and had no problems until after the deluge.

Maybe this works just for the ductwork and leave the black mold out of it? The black mold, in a sense, merely was the telltale alert to the real damage?

The loss is $7k in repairs less, say a grand, for the FMV increase due to the new metal ductwork.

Tax Writer (talk|edits) said:

8 April 2014
Maybe this works just for the ductwork and leave the black mold out of it? The black mold, in a sense, merely was the telltale alert to the real damage?

I would say this was a "sudden and unexpected event" (the flooding) and the black mold was one of the results, so the date of the actual casualty was the date of the rains/flooding, and the subsequent repairs were made within a reasonable time after discovery of the damage. That would be my position in this case

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