Question

Covid Loss Scenario

Forum|Forum|5 years ago
February 19, 2021
3 replies
0 views

In March of 2020 I engaged with a contractor to start a major home remodel. For simplification, assume the contract was for $50,000. From March to September, I paid the contractor $15,000 as work was completed. In Oct, the contractor was killed by Covid, and the contracting company (single person LLC) was declared bankrupt.

In Nov, after getting several estimates, I engaged with a new contractor to continue the work for $60,000.

Q1: Can I declare the $15000 paid to the original contractor as a Covid disaster loss?

Q2: Can I declare the difference between the two estimates as an additional loss?

TurboTax Home & Biz Windows

A

AmeliesUncle

@mlp76 wrote:
I paid the contractor $15,000 as work was completed.

1) You paid for $15,000 of work. That isn't a loss.

2) A "loss" means you owned something and no longer own it. Changing to a higher priced contractor is not a loss.

M

mlp76Author

But the work was determined to be of 0 value by all the following contractor estimates, wouldn't that be considered a loss?

O

Opus 17

Employee

@mlp76 wrote:

But the work was determined to be of 0 value by all the following contractor estimates, wouldn't that be considered a loss?

No, it's not a theft loss or a casualty loss. (And the new contractor has a financial incentive to say that even if it wasn't true.) It is simply the case that you are now paying $75,000 for improvements that you thought would cost $50,000. The cost is added to the cost basis of your home and may reduce your capital gains when you sell.

A casualty loss is when a tree falls on your roof, not when a roofer does an inadequate job for what you pay. And in any case, COVID-19 is not a disaster for purposes of a casualty loss.

O

Opus 17

Employee

Although Covid is a national emergency, I do not believe it is a qualified “disaster” that would allow you to deduct any casualty losses on your tax return.

Even if it was, your only loss would be the difference between the value of the work you paid for and the value of the work you received from the first contractor. If you received $15,000 worth of goods and services from the first contractor, then you don’t have a loss. If you received less than what you paid for, you would have a loss, but that could be very difficult to prove.

And then, even if Covid was considered a qualified natural disaster, and even if you could prove you had a loss of a few thousand dollars, casualty losses are very difficult to deduct. They are only deductible to the extent that the loss is more than 10% of your adjusted gross income. Meaning that if we assume that you had a $5000 loss on the first contractor, you would not be able to deduct anything unless your adjusted gross income was less than $50,000.

M

mlp76Author

> Although Covid is a national emergency, I do not believe it is a qualified “disaster”

So this is certainly an important point, but it seems to be officially declared here:

https://www.fema.gov/disaster/4482

What else would be needed to make it "qualified"?

O

Opus 17

Employee

Note that the entire price that you paid may be added to the cost basis of your home and may reduce your capital gains when you sell, even if you did not get “full value” for the price you paid because of the first contract or’s untimely demise.