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Theft Loss? Casualty Loss? Out of Luck?

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DickyJean

Junior Member
What is the name of your state? DC

Hi Folks,

Cross posted to Tax Law

In March I bought a fully rennovated "luxury" basement condo in DC. In late May, a major rain event caused water to enter our unit, ruining our hardwood floors and causing mold to grow. I've torn down some drywall, had plumbers in to inspect the drain tile system, had a water engineer evaluate everything and a mold specialist take samples. Having the drywall removed shows signs that the water infiltration is more of an ongoing problem with systematic drainage failure and insufficient waterproofing. The gist of it is that what I own is not what I thought I was purchasing. We are pursuing remedy from the developer, but even if we do win I am not sure we will recover all of the damages.

I've read Publication 547 over and over, and it appears I can do one of two things:
1. Claim a casualty loss on this year's tax return. The loss would be the difference between the FMV of my condo immediately before the May rain event and the FMV immediately after the May rain event. I would have a retrospective appraisal done to substantiate the FMVs. Any gains from recovering the damages from the developer will have to be reported when (if) they are received, but the taxes on the gains could be postponed by purchasing a new home and reducing my basis in the new home.

2. Claim a theft loss on this year's tax return based on the part that says "The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law." I am assuming that this type of misrepresentation is illegal in DC (though I have no idea). If so, the evidence of the systemic problems and the current FMV would be used to substatiate my claims. Again, any gains from recovering the damages from the developer will have to be reported when (if) they are received, but the taxes on the gains could be postponed by purchasing a new home and reducing my basis in the new home.

So, am I on the right track? Am I way off? Is there case law that contridicts my interpretation of Publication 547? Would the developer have to be charged or convicted to substantiate the theft loss? Is there someone who wants to walk me through this?

Thanks,
The newlywed in the moldy basement
 



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