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The oil tank probably isn't a casualty loss because it (probably) wasn't sudden/unexpected but due to gradual deterioration. Nevertheless, I don't think that will affect impact of the reimbursement on your tax return. (That is, I expect you will find that you can ignore the reimbursement.)

I think your conclusion is right because on page 2 of Pub 547, under Casualty is a sub paragraph Progressive deterioration that basically says that progressive deterioration is foreseeable, and not a casualty loss. However it goes on with an example of progressive deterioration:

"The deterioration and damage to a water heater that bursts. However, the rust and water damage to rugs and drapes caused by the bursting of a water does qualify as a casualty." [Emphasis mine.]

So the cost of a new oil tank (if I got one, which I did not), the cost of removing the old one, are both the result of progressive deterioration. But the damage to the water table, etc., seem to be like the rust damage to carpets and drapes in the previous example. At least I can interpret it so.

We will see, once the remediation is done and all the necessary money from the State of NJ is paid if I get a 1099G (or some such thing) or if it is silent. If I get no tax form from the state on this, I guess I am home free.
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