A basement remodel gone awry - deducting a theft or property loss

May 21, 2014 by Dave Du Val, EA
Handcuffs laying on a 1040 form

Hey Dave,

We took out a home equity loan to redo our basement. The contractor did not perform the work as agreed and what was performed had to be torn out. We were actually left with a less functional basement than we had before the project was started. Does the money paid to this contractor qualify as something that would be deductible?

Aaron

 

Hi Aaron,

Uninsured losses of property due to a theft are generally tax deductible. In the case of personal use property, such as your home, a theft loss deduction is a personal itemized deduction claimed on Schedule A. Theft losses are deductible only to the extent that they exceed 10% of your adjusted gross income (AGI), and the first $100 of a loss is not deductible.

For tax purposes, theft includes far more than a robbery or burglary. It includes any criminal appropriation of someone else’s property by theft, swindling, false pretenses, and any other form of guile. You can be entitled to a deductible theft loss if you can prove that a building contractor deliberately lied and/or deceived you to take your money.

On the other hand, you would not have a theft loss when a contractor does perform the promised work, but you don't happen to like the quality of the work. Poor workmanship is not considered to be fraud and therefore it does not result in a theft loss. At most, it would be considered negligence and/or breach of contract.

There may be other avenues open to you in your attempt to collect monies you paid to the contractor or the damages. You may want to contact the company the contractor works for (if possible), or the state board that handles contractor disputes and the bonds that have to be posted; or you could sue in small claims court, or hire an attorney or a collection agency.

Deductibly yours,

Dave

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Rhonda D. Guillory, EA
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Rhonda was a Seasonal Tax Return Reviewer at TaxAudit before joining the permanent staff as an Audit Representative in 2009. She has a Bachelor of Science in Computer Science and worked in the Information Technology field for 15 years before making a career change. Since transitioning to the field of income tax in 2003, she has prepared and analyzed hundreds of tax returns. Rhonda enjoys helping taxpayers and tax professionals learn and understand the fascinating world of income taxes. Currently, she is the Learning and Development Manager.


 

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