Uninsured losses on property theft and fraud are tax deductible | South Salem Real Estate

Fraud by building contractors is a distressingly common occurrence.

How’s this for a nightmare scenario: You agree to pay a contractor $400,000 to tear down part of your house and put in an addition. While the work is going on, you, your spouse, and five children stay with the wife’s parents. The contractor tells you that the work is progressing according to schedule and you make multiple payments.

Suddenly, the contractor dies. He was only 30 years old. It turns out he was a drug addict. You discover that the contractor failed to do much of the work he said had been done. Moreover, considerable damage was done to the house during construction because the contractor failed to protect it from the weather.

Naturally, you sue everybody you can. The only entity that has any money you can collect from is the deceased contractor’s insurer. Unfortunately, it turns out that the insurance policy lapsed because the premiums weren’t paid. In the end, you settle with the insurer for $10,000.

All this happened to James and Gaetana Urtis. They figured that at least they could deduct some of their losses from their income taxes. They claimed a $188,070 theft loss deduction — the amount they paid the contractor that they determined he had pocketed instead of doing the promised work.

But — you guessed it — the IRS denied the deduction.