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Hi all! I live in NJ and recently my well went bad and I had to have another one dug. Total cost was about $5,150 out of pocket. I have an insurance claim in, but don't don't know how that will pan out.

Is this expense tax deductible? I was given, along with the bill, a notice to sign Form ST-8, Certificate of Exempt Capital Improvement. I am not sure what this means.

Thank you so much for your help!


Mike in NJ
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No. of Recommendations: 2
Hi all! I live in NJ and recently my well went bad and I had to have another one dug. Total cost was about $5,150 out of pocket. I have an insurance claim in, but don't don't know how that will pan out.

Is this expense tax deductible? I was given, along with the bill, a notice to sign Form ST-8, Certificate of Exempt Capital Improvement. I am not sure what this means.

Thank you so much for your help!

Mike in NJ

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Ira is the usual NJ expert, but I'll tell you what I can. The easy part first.

The Form ST-8 is a NJ state sales tax form, a certification that the new well was an improvement to real estate, and therefore the labor and/or other service charges (but apparently not materials?) were exempt from sales tax. So I guess you weren't charged sales tax for the job. That should be straight-forward.

As for income tax deductible?? You say the well "went bad".
Was this due to drought? Groundwater contamination?
There isn't much to deduct, unless it qualifies as a casualty loss, which usually has to be a sudden event. A drought never used to qualify, until back in the Reagan administration days, I think. At that time, a number of places were declared as disaster areas due to drought. And a federally-declared disaster will get casualty loss treatment. So that may still happen for a lot of places this year.

But a casualty loss is of limited value. It's only deductible to the out-of-pocket after insurance, and only to the extent that it exceeds 10% of your adjusted gross income. Some years that floor was removed, for hurricanes and floods, I recall, but I think it's back now.

If the damamge is due to some other cause, please tell us more.
Best case scenario is that you recover on the insurance claim.

Bill
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Mike,

Was this on your new house? I can't remember how recent the purchase was, but have any of your neighbors commented on the previous owner having the same issue, and he didn't disclose it? If so, this might be one of those times to sue.

IP
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I have an insurance claim in, but don't don't know how that will pan out.

Is this expense tax deductible?


Not immediately deductible as an expense, but as a capital improvement to your home, it may be an increase your adjusted basis. If you do succeed in the insurance claim, be aware that any reimbursement that you receive from the insurance company will deduct from your adjusted basis and will be an offset to the increase in basis. See Worksheet 1, the instructions for Worksheet 1 and the section on Determining Basis in IRS Pub 523 http://www.irs.gov/pub/irs-pdf/p523.pdf as a starting point.

AJ
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No. of Recommendations: 2
Hi all! I live in NJ and recently my well went bad and I had to have another one dug. Total cost was about $5,150 out of pocket. I have an insurance claim in, but don't don't know how that will pan out.

Is this expense tax deductible? I was given, along with the bill, a notice to sign Form ST-8, Certificate of Exempt Capital Improvement. I am not sure what this means.

Thank you so much for your help!


ST-8 is a sales tax exemption form.

At the federal level, there are only two ways that I can see any deductiion. One, as a casualty loss, but the threshold for that is quite high ($100 plus 10% of AGI), and the other, if part of your home was used for business purposes and you could justify claiming the replacement well was a repair and not a capital improvement.

Since NJ generally limits deductions to medical expenses, alimony, and real estate taxes, there is no relief on your state taxes.

Ira
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