Can I take a loss on rental apartment we own when the builder caused damage through mistakes and would not repair?

[Artandmusic1990]

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. Contractor refuses to pay anything. How do I handle this?

[DavidD66]

Since it is personal property (as opposed to business or rental) there is no tax deduction or credit that you can take. 

[Artandmusic1990]

I wasn't sure how much information I could put. His father moved out to assisted living and we have rented it for over two years. Does that change things.

[Mike9241]

are you renting to your FIL at fair rental value? why are you not during the contractor?

[Artandmusic1990]

We have rented it under the Fair Rental Value as the young man is a church staff member. We have considered suing and if no loss can be claimed, we may see if a mediation could happen. The contractor's liability insurance said our case does not fall under liability insurance because it did not happen during construction. We are not sure if we want to go through legal because of time, cost, and the degree of hostility already shown by the contractor. Have considered contacting Better Business Bureau.

[Artandmusic1990 · Accepted solution]

Mike, the FIL is no longer living there. It is a non-family member.

[Carl]

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.

[Artandmusic1990]

Thank you, Carl. This is a big help. As far as the contractor, we know now he never had it inspected. And thanks for the advice on legal. I am concerned that if we do not take action, there may be other folks facing this as well.

[Carl]

I've only had one experience that I would consider anywhere close to yours. In my case, a property surveyor did s survey on a property I was purchasing, and placed my property line on one side, incorrectly. Years later I put up a fence that was 6-12 inches on my side of that property line. About a year later the property next to me was sold and that survey for the other property put my fence on the neighbor's property. The neighbor took it upon themselves to remove my fence from what I though was my property. So I took the neighbor to small claims court.

Since our two property surveys were in directly conflict with each other, the judge ordered the county surveyor to perform a survey. Turned out, my survey was wrong so the neighbor had no liability for my fence that he removed from his property.

So I went to the company that did my survey to request they reimburse me for court costs, as well as the replacement cost of a replacement fence on my side of my "real" property line. As expected, they ignored me. That is, until they got the summons to appear in court. It never went to court. The survey business cut me a check for everything.

Depending on the financial size of the contractor that did the original construction, they'll pay your costs upon receipt of a summons to appear, or they'll go to court where I would expect them to lose and end up filing bankruptcy. But if they file bankruptcy, the best part of that is that you will most likely be the 2nd or 3rd in line to receive any compensation from disposition of assets. Doesn't mean you'll actually get any compensation. But they'll be out of business - for awhile at least.