Dear Tax Talk,
My daughter was cooking meth in my home that she lived in rent-free, and I have been advised by the police that I need to gut the inside of my home. Is this considered a casualty for tax purposes?
-- Sandi
Dear Sandi,
Children, huh? You didn't describe what happened to the house as a result of the meth production. Luckily, everything you could possibly want to know is available on the Internet, where I found the following information:
Buildings used to make meth can be a health risk to the next unsuspecting tenants. Toxic vapors may have absorbed into the furniture, flooring, air vents and walls. Harsh liquids dumped or spilled can remain for a long time as residue in bathtubs, toilets, sinks or floors.
For tax purposes, a casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.
- A sudden event is one that is swift, not gradual or progressive.
- An unexpected event is one that is ordinarily unanticipated and unintended.
- An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.
For example, if the house had caught fire as a result of the meth production, that would qualify as a casualty loss. However, if the house had been rendered uninhabitable because of the toxic fumes then it would be considered a progressive deterioration similar to a termite infestation. This would not be considered a casualty loss.
If you gut the home and convert it to a for-profit rental activity, the cost of the improvements would be subject to depreciation. Residential rental property is depreciated evenly over 27.5 years. It is hoped that your daughter will be out before then.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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