Can cost of re-plumb be deducted as casualty loss?

The amount you can deduct for a casualty loss is based on the decrease in the fair market value of the property as a result of the casualty. The cost of repair might be useful as an indication of how much the value decreased, but re-plumbing the whole house went way beyond repairing the damage, or restoring the house to its value before the leak. The re-plumbing does not meet the definition of a deductible casualty loss.

The re-plumbing is an improvement to the property to protect against a possible future casualty. You add the cost to your cost basis in the house, which will come into play in calculating your profit when you eventually sell the house. But you cannot deduct it as a casualty loss.

You should read the section on "Figuring a Loss" on pages 4 and 5 of IRS Publication 547, which you can download from the following link.

Bob Sandler

wouldn't PART of the replumbing meet the definition of a deductible casualty loss/repair, with the remainder, not related to the leak, be a capital improvement?

No, I don't think so. Here's what Pub. 547 (p. 5) says about using the cost of repairs as a measure of the decrease in fair market value.

"The cost of repairing damaged property is not part of a casualty loss. Neither is the cost of cleaning up after a casualty. But you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions.

- The repairs are actually made.

- The repairs are necessary to bring the property back to its condition before the casualty.

- The amount spent for repairs is not excessive.

- The repairs take care of the damage only.

- The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty."

The replumbing fails at least two and probably three of the conditions.

- None of the replumbing was "necessary to bring the property back to its condition before the casualty." None of it was directly related to repairing the leak. They didn't repair the leak. They didn't bring the property back to its condition before the casualty. They abandoned the leaking pipe and put in all new plumbing.

- The repairs did not "take care of the damage only."

- The value of the house after the replumbing is probably more than the value before the leak, because the new plumbing is superior to the original plumbing.

Because the required conditions aren't met, the cost of the replumbing cannot be used as a measure of the decrease in FMV, so it cannot be used to determine the amount of the deductible loss. None of the replumbing is a repair. The entire replumbing is an improvement. The cost of the improvement has to be added to the basis.

Bob Sandler

I disagree as to that portion of the plumbing repair that solved the problem of the leak without the need to jackhammer up the entire slab.

I agree with Bob's analysis. The shorter version is that an event must be sudden and unexpected for the loss to be deductible as a personal casualty. Pipes finally failing after years of routine use is not sudden. It took years of ordinary wear and tear for them to fail.

Bill Brown