Tax law allows an itemized deduction for personal uninsured losses suffered as the result of a theft or casualty event, such as a fire or storm. And sometimes “theft” can apply to unusual situations.
The Tax Court recently ruled that a couple swindled by a contractor in connection with remodeling their home was entitled to a theft loss deduction.
In 2005, James and Gaetana Urtis hired Onyks Construction to conduct a $400,000 remodeling project on their home. In 2006, after receiving about $400,000 in progress payments, the contractor died unexpectedly, leaving the project unfinished and many subcontractors unpaid.
While attempting to pursue claims against the construction company and the estate of the deceased owner, the Urtises discovered that the insurance policy the contractor maintained on the construction had lapsed. Unable to recover their losses, they claimed a theft loss deduction in 2007. The IRS disallowed the deduction.
The court determined that the actions of the contractor constituted home repair fraud, a theft under applicable state law. Moreover, the court said that the Urtises properly took the deduction in the year after the contractor’s death because it was the year they determined that there was no possibility of recovery.
Although the IRS argued that the Urtises should have claimed the theft loss in an earlier year, when they first discovered the theft, the court ruled that a possibility of recovery existed prior to 2007 because it had not yet been determined that the insurance policy had lapsed. (James M. Urtis and Gaetana R. Urtis v. Commissioner, TC Memo 2013-66, March 5, 2013)
If you are considering a deduction for a casualty or theft loss, it’s generally a good idea to claim the loss in the earliest year possible. That way, if the IRS determines that you have chosen the wrong year, the correct year will not be closed by the statute of limitations.