The IRS has sent this letter to Sen. Jim Webb (D-VA), explaining that homeowners may be able to deduct losses caused by defective Chinese drywall as casualty losses under § 165(c)(3):
[Y]our constituents['] ... homes were constructed with Chinese drywall. The constituents said that Chinese drywall emits putrid smell and gas causing various health problems, as well as extreme and unusual corrosion of pipes, air conditioning coils, and electrical appliances. They indicated that these problems arose soon after construction of the homes, with the result that the homes are uninhabitable. ...
[Y]our constituents['] ... homes were constructed with Chinese drywall. The constituents said that Chinese drywall emits putrid smell and gas causing various health problems, as well as extreme and unusual corrosion of pipes, air conditioning coils, and electrical appliances. They indicated that these problems arose soon after construction of the homes, with the result that the homes are uninhabitable. ...
A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, and unusual. Damage or loss resulting from progressive deterioration of property through a steady operating cause is not a casualty loss. ...
The EPA and the Consumer Product Safety Commission are investigating the reported problems with Chinese drywall. If it is determined that Chinese drywall emits an unusual or severe concentration of chemical fumes that causes the extreme and unusual damage you describe, affected taxpayers can qualify for a casualty loss deduction.
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