Covid Loss Scenario

[mlp76]

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?

[AmeliesUncle]

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@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.

[Opus 17]

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.

[Opus 17]

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.

[mlp76]

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

[mlp76]

> 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"?

[Opus 17]

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@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?

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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. 

[mlp76]

You're seeming to imply it's impossible to incur a loss via breach of contract.   I don't think civil case histories support that view, but I'm happy to be corrected.

[Anonymous]

Q1: no

Q2: no

While certainly, you can have a loss with a breach of contract there are few very important things here that you're missing in your creative logic:

1. While in some limited cases a contract's terms can extend beyond death, it is highly unlikely that was spelled out in the terms of your contract with this contractor.  Therefore, you had no breach of contract.
2. There are losses, and then there are tax losses.  Breach of contract is a casualty loss, which is one of the few personal losses that has some limited deductibility on the federal tax return.
3. For the most part (there are some exceptions) the only personal losses deductible on a tax return have to be casualty losses specifically declared as federal disasters on this specific list: https://www.fema.gov/disasters/disaster-declarations

The IRS seems to take some perverted pleasure in using similar language for certain terms that can cause much confusion for the average taxpayer.  The use of "disaster" in some of the language surrounding things like provisions allowing access to retirement funds and the like might lead you thinking down this path for some creative solutions but all of the above already disqualify it.  That not withstanding, COVID didn't directly cause damage to your property.  There has been some discussion that there could be some arguments made for limited property/casualty deductions for business loss - say if you made up a whole bunch of a product to sell at a concert that was canceled due to COVID - but most experts agree even that is a stretch should it face an audit.

As far as for your personal loss the remodeling of your personal home there is ABSOLUTELY ZERO CHANCE that you can successfully make an argument that the death of your contractor and the subsequent increase in the cost of your project for your personal residence upgrade (something that just isn't a taxable deduction of any sort in the first place) is a casualty loss at all (though it is a loss), much less one that would be covered under the COVID-related disaster provisions. 

Personal losses are not deductible, regardless of why they occur, though limited exceptions for some personal casualty losses in certain federally declared disaster areas have been made since the suspension of casualty and theft losses as miscellaneous deductions (a weak deduction anyway.)  Your personal loss, though tragic, is not a tax deduction.