Built apartment for father-in-law 5 years ago. Recently found mold and discovered contractor failed to put waterproofing behind shower tile. Spent over $15,000 to remediate mold and rebuild bathroom
There is no loss here, no matter how you look at it. But what you do have is a property improvement that adds to your cost basis. The cost of this improvement ($15K) would be entered as such in the assets/depreciation section, classified as residential rental real estate and depreciated over 27.5 years.
As for dealing with the contractor, get a lawyer on the case. More than likely it won't make it to court before the contractor settles. I'm also wondering how the property passed the county inspection, assuming the contractor pulled the property building permits prior to construction.
