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"(6/1/07) Q: How will the IRS will handle water damage "mold issues" as a result of insufficient repairs or whatever the cause. Will there be special reporting on the loss related to mold?
A: Whether individuals may claim damage to their personal-use property from mold as part of a casualty loss depends on the facts and circumstances of each situation. A key factor to consider is whether the mold damage occurred as a direct result of the disaster or from some other intervening cause since there must be a causal connection between the casualty event and the loss claimed by the taxpayer. For example, individuals would not be entitled to deduct as part of their casualty loss mold damage that occurred as a result of insufficient repairs. The individuals’ casualty loss deduction would be limited to the property damage caused by the disaster. In addition, if a large amount of time lapsed between the date of the hurricanes and the formation of the mold, this raises the question of whether the mold damage was caused by the disaster or by some other factor.
The formation of mold may qualify as a separate casualty. A casualty is an event that is identifiable, damaging to property, and sudden, unexpected, and unusual in nature. An event is sudden if it is swift and precipitous, and not gradual or due to progressive deterioration of property through a steadily operating cause. An event is unexpected if it is unanticipated and it occurs without the intent of the one who suffers the loss. An event is unusual if it is extraordinary and nonrecurring, one that does not commonly occur during the activity in which the taxpayer was engaged when the destruction or damage occurred and one that does not commonly occur in the ordinary course of day-to-day living of the taxpayer. If, under a particular set of facts, the formation of mold is a sudden, unexpected, unusual and identifiable event that caused damage to the individual’s property, then it would qualify as a casualty and the individual may be entitled to deduct the loss for the resulting property damage as a casualty loss under section 165(c)(3) if the individual satisfies the other requirements for the deduction."
