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JOE McCARTHY: Good morning. Welcome to the presentation on deteriorating residential concrete foundations. My name is Joe McCarthy, and I'm a senior stakeholder liaison with the Internal Revenue Service. Before I start the presentation, I would like to go over some administrative items. Audio for today's webinar will be available through your computer speakers only. On the next slide, I'll share some audio I'm sorry, I'll share some tips and best practices that may help you in case you have a technology issue during the broadcast. In case you experience a technology issue, this slide shows some helpful tips and reminders. We posted a technical help document that you can download from the materials button on the left hand side of your screen that provides the minimum system requirements for viewing this broadcast along with some best practices and quick solutions. And if you've completed and passed your system check and still have problems, then you can try one of the following. One option is to close the screen where you're viewing the webinar and relaunch it. The second option is to click the gear icon on your viewing screen that you can find at the top right hand corner of the slide. You will be given two choices: Select flash instead of HLS in the available media box. You may have received today's PowerPoint, a technical support document, and a resource guide in the reminder e mail. If you did not receive the reminder e mail, you can download this document by clicking the materials button. It's on the left-hand side of your screen as shown on this slide. If you have a topic specific question for us today, please submit them by clicking on the ask question button, also on the left hand side of your screen. Enter your question in the text box, and don't forget to click submit.

Please, and I cannot emphasize this enough, please do not enter any sensitive or taxpayer specific information. We really do appreciate your questions, though. Don't be shy, and remember to submit them. While the issue of deteriorating residential concrete foundations caused by the mineral pyrrhotite affects relatively few taxpayers in Connecticut and Massachusetts, the issue is of major significance to the people who are affected. Today we're going to discusses Revenue Procedures 2017 60 and 2018 14. These are the Revenue Procedures that deal directly with the pyrrhotite issue. Now, the issue can get a bit technical, so I'm going to walk you through the Revenue Procedures in hope of making you familiar with the major points of the issue. I would like to start the presentation with a definition of a casualty loss. A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual, and that the loss of property due to progressive deterioration is not deductible as a casualty loss. As such, deteriorating residential concrete foundations would not normally qualify for casualty loss treatment. However, in this specific situation, deteriorating residential concrete foundations in Connecticut and Massachusetts caused by the mineral pyrrhotite do qualify for casualty loss treatment under the safe harbor provisions as described in IRS Revenue Procedures 2017-60 and 2018-14. Again, I'm going to be walking you through these Revenue Procedures and reviewing the qualifying requirements, the limitations of the casualty loss claims, the process of how to claim the casualty loss, and the timing of payments related to the casualty losses. Before I start the review of Revenue Procedures 2017-60 and 2018-14, I want to tell you that there's no need to feverishly scribble down notes. All the information contained in the following slides are word for word excerpts from the Revenue Procedures which are easy to find on the internet. Just do a word search for Revenue Procedure 2017-60 or 2018-14, and they'll pop right up. Also, the excerpts from the Revenue Procedures are cited at the bottom of each slide.

So what is a safe harbor? A safe harbor in this instance is an exception to a general rule.

So while deteriorating residential concrete foundations would not normally qualify for casualty loss treatment, if you follow the safe harbor rules, a deteriorating concrete foundation can qualify for casualty loss treatment. So how can a taxpayer qualify for the safe harbor provision outlined in Revenue Procedure 2017-60 that will allow the taxpayer to claim a casualty loss for deteriorating concrete foundation? Well, there are two ways to qualify for the safe harbor. Here is the first way. In order to pass this test, a taxpayer must have obtained a written evaluation from a licensed engineer and that evaluation must indicate that the foundation was made with defective concrete. Let's go to the next slide for the other parts of this test. Here are the other parts of the first test. The taxpayer has to have requested and received a reassessment report from the town the property is located in. The report must show the reduced reassessed value of the residential property which is based on the written evaluation from an engineer and inspection pursuant to Connecticut Public Act 16-45. Now, I'm not going to go into detail on Connecticut Public Act 16-45 because I do not deal with Connecticut law, other than to say that there are some very specific time lines that have to be met in order to meet that statute's requirement. Connecticut Public Act number 16-45 is also freely available on the internet.

So for this safe harbor's method, let's review the test one more time. In order to pass this test, the taxpayer must have obtained a written evaluation from a licensed engineer and that evaluation must indicate that the foundation was made with defective concrete. The taxpayer has to have requested and received a reassessment report from the town the property is located in and the report must show the reduced reassessed value of the residential property which is based on the written evaluation from the engineer and inspection pursuant to Connecticut Public Act 16-45.

So not only does the taxpayer have to obtain a written is it evaluation from a licensed engineer indicating that the foundation was made with defective concrete, but they also have to have requested and received a reassessment report that shows the reduced reassessed value of the residential property based on the written evaluation from the engineer and the inspection pursuant to Connecticut Public Act 16-45. If they meet these requirements, they qualify for the safe harbor under Revenue Procedure 2017-60. Now, it goes without saying that this safe harbor method is available only for residential properties in Connecticut. Now let's look at a second way to qualify for the safe harbor. Here is the second way a taxpayer can qualify for the safe harbor.

So how can a taxpayer qualify for the safe harbor provision outlined in Revenue Procedure 2017-60 that will allow a taxpayer to claim a casualty loss for deteriorating concrete foundation under this method? casualty loss for deteriorating concrete foundation under this method? There are some tests the taxpayer has to meet. This safe harbor is available to a taxpayer whose personal residence is in Connecticut or outside of Connecticut who has obtained a written evaluation from a licensed engineer indicating the foundation was made with defective concrete containing the mineral pyrrhotite, so unlike the first method of qualifying for the safe harbor, this safe harbor is available to taxpayers whose residence is inside or outside of Connecticut, basically Massachusetts. Also you will note that there is no requirement to have a reassessment report showing the reduced reassessed value of the property. So again, this test makes the safe harbor available to a taxpayer whose personal residence is in Connecticut or outside of Connecticut provided the taxpayer has obtained a written evaluation from a licensed engineer indicating the foundation was made with defective concrete containing the mineral pyrrhotite. Remember, and this is important, a taxpayer only has to qualify under one of the two methods in order to qualify for the safe harbor provision. Let me repeat that. A taxpayer needs only to qualify under one of these methods in order to qualify for the safe harbor under Revenue Procedure 2017 60. Now, in order to claim a casualty loss, you generally compare the value of the property immediately before the loss to the value of the property immediately after the loss. The decrease in the value would be your unadjusted casualty loss amount. However, in order to simplify the process of determining the amount of the casualty loss, taxpayers can use the cost to repair the property as evidence of the decrease in the value of the property. It's a nice easy way of determining the unadjusted amount of the casualty loss. And for those of you who are interested, on this slide are references to the existing regulations, that reference is to IRS regulation 1.165-7. Let me repeat that. IRS regulation 1.165-7. Let's move on to casualty loss limitations. The amount of the taxpayer's casualty loss resulting from deteriorating concrete foundation is limited to the taxpayer's adjusted basis in the property. So even though a taxpayer may have incurred costs to repair their damaged property in excess of their adjusted basis in the property, their loss would be limited to their adjusted the basis in the property. Now, for those of you who are not familiar with the term adjusted basis, as it is a rather technical term, I will refer you to IRS publication 551. That's IRS publication 551, for a detailed discussion on the factors to consider when determining the adjusted basis of a property. Now we're going to discuss some other limitations to the amount of the casualty loss that can be deducted. These loss limitations are the same limitations that are applied to all casualty losses. The loss must exceed $100 and the loss must exceed 10% of the taxpayer's adjusted gross income. This also means that the taxpayer must itemize their deductions in order to claim the casualty loss. These limitations are pretty simple and straightforward, and they're probably familiar to anyone who has previously prepared tax returns claiming casualty losses. Now, let's go on to the next casualty loss limitation. A taxpayer who does not have a pending claim for reimbursement and who does not intend to pursue reimbursement may claim a loss -- may claim as a loss all unreimbursed amounts paid and that's the keyword here, "paid," during the taxable year to the damage -- to repair the damage to the taxpayer's personal residence caused by the deteriorating concrete foundation. Again, this is subject to the adjusted basis limitation. So the general rule is that the loss is deductible in the year the foundation repairs are paid for. However, there is an exception to this rule for casualty losses claimed on a 2017 tax return under Revenue Procedure 2018 14 which we'll go over in a few minutes. Now, there is yet another limitation fee amount you can claim as a pyrrhotite related casualty loss, and that is when a taxpayer has a pending claim for reimbursement or for a taxpayer who intends on pursuing the reimbursement. When the taxpayer has a pending claim for a pending reimbursement or who intends on pursuing reimbursement, they may claim a loss for 75% of the unreimbursed amounts paid during the taxable year to repair the damage to the taxpayer's personal residence caused by the deteriorating concrete foundation. Let's say the taxpayer has paid out-of-pocket $100,000 for foundation repairs the casualty loss would be limited for taxpayers with a pending claim or for taxpayers who intend on pursuing claims to 75% of that amount or $75,000 assuming all other requirements were met. Also, the amount the taxpayers are able to claim for pyrrhotite related casualty losses is limited to the amount paid to restore the taxpayer's personal residence to the condition existing immediately prior to the damage. So expanding the foundation to include an addition onto the home while making pyrrhotite related repairs or replacement would not be deductible. Only repairs made to bring the foundation to its original condition would be deductible. This slide is important. The information on this slide basically states that if a taxpayer chooses not to use the safe harbor under Revenue Procedure 2017-60, they would be required to use the normal casualty loss rules. Translation, if the safe harbor is not used, losses from deteriorating residential concrete foundations caused by the mineral pyrrhotite would generally not qualify for casualty loss treatment. So you have determined that you or your client qualifies for deteriorating foundation related casualty loss and you determine the proper casualty loss amount. How do you go about making sure the tax return is processed correctly, making sure that the IRS doesn't overlook that the return is using Revenue Procedure 2017-60 in claiming casualty losses? Well, when claiming a deteriorating foundation related casualty loss under Revenue Procedure 2017-60, the tax return must be paper filed and the form 4684, that's the casualty and thefts form, must be marked "Revenue Procedure 2017-60" on the top of the form. Finally, Revenue Procedure 2017-60 is effective for tax returns filed after November 21, 2017. The November 21, 2017 date applies to both timely filed tax returns and amended tax returns. Now let's move on to Revenue Procedure 2018-14 which discusses the timing of the payments made for deteriorating foundation related repairs and their deductibility. First, there must be an open statute of limitations in order to deduct a deteriorating foundation related casualty loss when repairs were paid for in 2016 or prior years. For example, an amended tax return could be filed for a timely filed 2015 tax return until April 15, 2019, or an amended tax return could be filed for a timely filed 2016 tax return until April 15, 2020, assuming all other qualifying conditions are met. So amended tax returns can still be filed for the 2015 and 2016 tax years as long as their statutes remain open and the amounts paid for repairs are current during those years. Please pay close attention to the information on this slide, as it is very important. Generally speaking, deductions are only allowed for cash basis taxpayers in the year the related expense is actually paid. However, Revenue Procedure 2018-14 is a very, very important exception to this rule. Revenue Procedure 2018-14 deals with the deductibility of pyrrhotite related casualty losses for payments made along with amended 2017 1040X tax returns. If a taxpayers pays to repair the damage to their foundation after filing an original 2017 income tax return and prior to the last day for filing a timely Form 1040X amended tax return for the 2017 taxable year, which would generally be April 17, 2021, the taxpayer may treat the amount paid as a casualty loss on a timely filed 1040X amended tax return for the 2017 taxable year. What Revenue Procedure 2018-14 is doing is expanding the safe harbor provision to include payments made after 2017. So qualifying payments made to repair deteriorating concrete foundations made in 2018 can be deducted on an amended 2017 tax return. Qualifying payments made to repair deteriorating concrete foundations made in 2019 can be deducted on an amended 2017 tax return. Qualifying payments made to repair deteriorating concrete foundations made in 2020 can be deducted on an amended 2017 tax return. Finally, qualifying payments made to repair deteriorating concrete foundations made up until April 17, 2021, can be deducted on an amended 2017 tax return. So qualifying payments made to repair deteriorating concrete foundations made after 2017 but before April 17, 2021, can be deducted as a casualty loss on an amended 2017 tax return. Okay. One last thing you should be aware of. As casualty losses of this nature can exceed a taxpayer's income in the year of deduction, the casualty loss can result in a net operating loss. Casualty loss deductions that qualify for the safe harbor under Revenue Procedures 2017-60 and 2018-14 are treated as trade or business deductions that can create or increase a taxpayer's net operating loss. A taxpayer can carry these net operating losses back two years and forward 20 years and the net operating losses can offset 100% of the taxpayer's taxable income in the carry back or carry over years. Any net operating losses from casualty losses meeting the requirements of Revenue Procedures 2017-60 and 2018-14 are treated as arising either in or before the 2017 taxable year.

Thus, the Tax Cuts and Jobs Act amendments that affect casualty losses and net operating losses in the 2018 tax year do not affect these net operating losses. The references for today's presentations are Revenue Procedures 2017- 60 and 2018-14. If you're dealing with these issues if you're dealing with this issue, these Revenue Procedures are must have information. Again, Revenue Procedures are available on the internet. Also, properties within Connecticut, you might want to refer to Connecticut Public Act 16 45, which is also available on the internet. Remember, Revenue Procedures 2017-60 and 2018-14 are your primary guide to this issue. They are relatively short in length. Revenue Procedure 2017-60 is about four pages long, and Revenue Procedure 2018-14 is about three pages long, so they don't take long to go through. With that, if there are any questions, I would be happy to address them at this time. Remember, if you have a topic specific question, please submit them by clicking the ask question button on the left hand side of your screen. Let's see if I can pull up some of these questions now. Okay. The first one is a question that actually happens pretty regularly. What happens if I receive an insurance payment after I deduct the loss? Well, if you receive an insurance payment after you deduct a deteriorating residential concrete casualty loss, whether it's an insurance payment or a payment from the new captive insurance company from the state of Connecticut or a lawsuit, that amount of money would have to be reported as income in the year that you receive it. So that's the answer to that question. Okay. Do the costs to replace landscaping as an original item such as decks and patios that need to be removed to fix the foundations be included in the amount allowed for casualty losses? And the answer to that is yes. I believe the publication you should refer to is Publication 457. Again, that's IRS Publication 457, if I'm not mistaken, and that publication deals directly with the landscaping issue. Let's see, if I pay to make repairs in 2018, can I deduct them on my 2018 tax filing? No, you cannot. As of 2018, with the passage of the Tax Cuts and Jobs Act, the only time you can deduct casualty losses is if you are in a federally declared disaster area. So if you paid to make repairs in 2018, you would have to file a 2017 amended tax return in order to get that casualty loss claimed on that return. So as I said before, if, in fact, that you go back, you amend that 2017 tax return, that amount of the casualty loss exceeds your taxable income, it creates a net operating loss, you can carry that loss back two years and forward 20 years. Okay. Any other questions? And remember, if you have a topic specific question, please submit them by clicking on the "ask question" button on the left hand side of your screen. We'll wait a couple more minutes to see if any more questions come out. Let me hit the refresh button here. Okay. If all my repairs were completed and paid for in 2018, does this get filed on my 2018 tax return or 2017 X tax return? I believe I just answered that, and the answer to that question is it would be on your 2017 tax return. The same is true if repairs were completed and paid for in 2019, 2020, and up to and including April 21, 2021, all those payments for those repairs would have to be claimed on an amended 2017 tax return. What was that Connecticut statute? The Connecticut statute was public act 16-45. Again, that's public act 16 45. Let me repeat that one more time, because it was asked a couple different times. It's Connecticut Public Act 16-45. That's 16-45. Will every tax return using these Revenue Procedures be audited by the IRS? If so, are there extra steps that taxpayers should take to ensure that they have submitted all the required materials are to the IRS? I just don't have that answer to that question. Tax returns are selected for audit in a variety of different ways. Would every single one of them be audited? I don't even want to guess, but if I did, I would say it would probably be unlikely. The key to remember here is to make sure that you're complying with the safe harbors, and when you file that tax return, you have to file by a paper and also put at the top of the form, I believe it's 4684, that you have to label it "Revenue Procedure 2017-60". Okay.

Please clarify, if this deterioration occurred to your personal residence, you can treat this as a trade or business loss and the new rules for net operating losses are disregarded. Again, I'm going to refer you right back to the slide, the Commissioner on October 15th issued an opinion on this, and basically I'll go back to that slide and I'll read you what it says. Hold on one second. Here we go. A casualty loss that qualifies for the safe harbor under Revenue Procedure 2017-60 and 2018-14 are treated as a trade or business deduction and can create or increase the taxpayer's net operating loss. A taxpayer can carry these net operating losses back two years and forward 20 years and the NOLs can offset 100% of the taxpayer's income. Then at the last line, which is unfortunately not on the slide, it basically states that if the net operating loss from the casualty loss is meeting requirements of Revenue Procedure 2017-60 and 2018-40 are treated as arising either in or before 2017 taxable year, thus the Tax Cuts and Jobs Act amendment that affect casualty losses and net operating losses starting in the 2018 tax year do not affect these net operating losses. So the new laws, there is no carry back forward -- carry forward period.

So I hope that answers that question. Must I incur an actual cost to claim a deduction or is it sufficient to have documented the reappraised value resulting from the loss? Well, again, there's two different ways of determining a loss amount. The first one is to compare the value of the property before the loss and then directly after the loss. The problem that you have here is that the condition of the property has deteriorated over time, so it's very difficult, if not impossible, to determine what the loss is using the method where you compare the value of the property immediately prior to the loss and immediately after the loss. Think about a hurricane comes in and wipes out your house. You definitely know what the property was worth beforehand and the house is worth nothing afterward. There's a distinct difference between the day before the hurricane and the day after the hurricane. Unfortunately, with deteriorating residential concrete foundations, the value has -- the property has deteriorated over time, so it's very difficult to determine the value of the property before the casualty and then after the casualty, and that's why the Revenue Procedure offers you the option to use the amount paid for repairs as the decrease in fair market value, subject to the adjusted basis of the property. So no matter what method you use, it's always going to be limited by the adjusted basis in the property. Is a replay of this webinar going to be available? We plan on -- this one is being recorded and it's going to be posted to the IRS video portal. Can we take a deduction if it was more beneficial to rebuild this, rebuild as part of replacing the foundation? That is a question that I have been asked before, and I just do not have an answer to this question at this point. We have consultants with IRS counsel to see if they can make a determination on that, and we have not heard back on that one particular issue. And the last question is, can the amount -- maybe we might have more questions.

Can the amount to move or replace a septic tank that was in the way of making the repair deductible? Yes, anything that's going to be associated with getting stuff out of the way, kind of like the landscaping question beforehand, that's going to be deductible under this provision.

Let's see if there's any more questions here. Can you carry back the NOL to 2015 if the payment is made after April 15, 2019? No, you cannot. The carry backs, according to Revenue Procedure 2018-14, the carry back is only to the 2017 year for payments made in either 2018, 2019, 2020, and the beginning of 2021. So you can't make a payment, let's say, on April 16, 2019, and go back and amend your 2015 tax return. You would have to go back and amend your 2017 tax return. So take a very close look at Revenue Procedure 2018-14, as that's explained in that Revenue Procedure. Can we essentially deduct all costs relating to restoring to original condition, including builder risk insurance and other -- that is a little bit specific. I just cannot give you a definitive answer on that. I apologize for that. If you have not paid a contractor for repairs, can you deduct the impending cost? No, you cannot. The casualty losses can only be deducted for the amounts paid. How long do I have to amend my 2017 tax return? For a timely filed 2017 tax return, you have until April 21, 2021. So any payments made to repair your concrete foundation up to and including April 21, 2021, for a timely filed 2017 tax return, you would be allowed to claim that to an amended 2017 tax return. Please don't wait until the last day, though. What must be included in an amended return for purposes of including the expenses paid after 2017? Is it the same as a normal amended return and the 4684 would be need to be marked "Revenue Procedure 2017- 60"? Yes, you would have to include that you're claiming this casualty loss under Revenue Procedure 2017-60 when filing an amended tax return. And again, that return would have to be paper filed. Is filing an amended tax return fairly simple or do you recommend hiring an accountant? That is a very difficult question to answer. It really depends on the level of expertise that the taxpayer has, but I will tell you that when you're talking about a deduction that is this large, you know, replacing a concrete foundation, I've heard numbers between $100- and $200,000 accident that's an awful lot to deduct and not know exactly what you're doing, so as kind of an insurance policy, you might want to engage the services of an accountant. There's no shame on getting a tax professional involved in an issue like this. And then if you have a simple return the following year, you know, to continue doing it on your own. I'll leave it up to the person's best judgment, but again there's absolutely no shame and you might do yourself a good turn by using a tax return professional in filing an amended tax return on this issue. And I believe -- let me see if there's any more that have come in. And that's all the questions that we have. Hold on one second. Okay.

There's no other questions that have come in. I would like to thank you for attending today's webinar. I really hope that the information we shared with you today was helpful, and feel free to sign off now. Thanks again.

IRS Revenue Procedure 2017-60 IRS Revenue Procedure 2018-14 Connecticut Public Act 16-45