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Ann Brookes

New Tax Deduction for Crumbling Foundations Expenses

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Crumbling foundations have been a living nightmare for many homeowners in northeastern Connecticut. Imagine discovering that the foundation to your home is deteriorating, literally crumbling, and can no longer safely support your home. Not only are kitchen cabinets falling off the walls, but you can’t sell your home, and it is worth less than you owe, never mind what you paid for it. Insurance won’t pay to fix this, and the bill to do so can be six figures. Many have been living this nightmare for years at no fault of their own.

The IRS just issued a Revenue Procedure that allows taxpayers to deduct unreimbursed repair costs to their personal residence as a casualty loss. Typically, a casualty loss is one that is sudden, unexpected and unusual, such as fire or theft. Crumbling foundations are a deterioration over time, so they haven’t met the general criteria. Homeowners who were burdened with unreimbursed repair costs could not deduct them from their taxes even though, to them, they were an unexpected tragedy.

Now, the IRS has determined that “A taxpayer who pays to repair damage to that taxpayer’s personal residence caused by a deteriorating concrete foundation may treat the amount paid as a casualty loss in the year of payment.” Rev. Proc. 2017-60. Like all tax deductions, there are rules, and the deduction for crumbling foundation expenses applies to “a taxpayer who has obtained a written evaluation from a licensed engineer indicating that the foundation was made with defective concrete, and has requested and received a reassessment report that shows the reduced reassessed value of the residential property based on the written evaluation from the engineer and an inspection pursuant to Connecticut Public Act No. 16-45.” The deduction is available to homeowners in states other than Connecticut, too.

This new safe harbor rule “is effective for federal income tax returns (including amended federal income tax returns) filed after November 21, 2017.” Nothing makes up for the impact of crumbling foundations on homeowners; access to an IRS safe harbor may afford a small financial remedy. You may wish to discuss this with your tax preparer if you believe you qualify for this deduction.

Settling with the IRS

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When you owe the IRS more money than you can afford to pay, it can feel overwhelming.  There is a solution to every tax problem, and often times, an offer in compromise (OIC) is one to consider.  An offer in compromise is a settlement with the IRS.  In most cases, an offer is made because there is doubt that the total amount owed the IRS can be paid.  In these types of OIC’s, the IRS essentially considers what you have, what you make, and what you spend.  If after doing so, they determine that the settlement amount offered is more than they could collect themselves, a settlement is possible.

If you live pay check to pay check and don’t live extravagantly, the numbers may show that you are a good candidate for an offer in compromise.  The IRS compares what you make to what you spend, and it considers the amount of money left over at the end of each month.  However, they don’t allow every expense when making this calculation.  There are real life expenses that the IRS doesn’t allow in a budget under ordinary circumstances, and this can feel unfair.  For example, the IRS generally doesn’t allow private school tuition.  They also have limits on what they will allow for a car payment.  If you have these kind of expenses, it may appear that you can afford to pay more per month to the IRS than your obligations permit.

The good news is that in the case of an offer in compromise, you don’t have to figure out how to send the same dollar two places.  The amounts allowed are for calculation purposes, and they determine the total amount the IRS thinks you can afford to pay in a lump sum settlement.  The same is true when evaluating your assets’ values in the what you have part of the equation.  I’ll discuss this in a later post.

Attorney Brookes provides many clients an evaluation of their circumstances and her opinion of whether they are a good candidate for an IRS offer in compromise.  It allows them to make an informed decision about whether or not to make an OIC to the IRS, and, if so, the amount to offer.  Very often, she does so for a flat fee.