Series: Tainted Drywall Foul air from Chinese-made drywall is causing a nightmare for thousands of homeowners, who have complained about severe respiratory ailments and corroded electronics. Several companies that handled the drywall knew there was a problem for two years but didn't warn consumers or regulators.

The federal government has made a modest step toward offering some financial relief to homeowners dealing with contaminated drywall. The Internal Revenue Service announced Thursday that it will allow homeowners to write off expenditures they have or will incur trying to fix their homes.

The Consumer Product Safety Commission has recommended (PDF) that homeowners remove all the drywall, along with the electrical, gas and fire safety systems -- essentially gutting the homes. The drywall, most of it imported from China, emits high amounts of hydrogen sulfide, which can corrode wiring and other electronic appliances, causing refrigerators and air conditioners to fail. Homeowners also have complained that the drywall triggers respiratory problems, nosebleeds and severe headaches.

According to the new IRS policy, homeowners can treat the amount they paid for these repairs as a "casualty loss in the year of payment." Casualty losses are typically reserved for repairs homeowners have made after a natural disaster or sudden event.

The policy includes some important caveats. For example, if a homeowner has filed a claim with an insurance company, the homeowner can write off only 75 percent of the amount the insurance didn't cover. Homeowners also must itemize their federal tax returns. Deductions will be granted only for amounts that exceed 10 percent of the taxpayer's adjusted gross income for the year the claim is filed and for amounts that exceed $500.

Taxpayers who have already filed tax returns for the year in which they paid to fix their houses have three years to amend their returns and claim the deduction.

Most insurance companies are not reimbursing homeowners for drywall problems. In fact, some homeowners say their insurers canceled their policies after they filed a claim.

The tax deduction helps only those homeowners who can afford to repair their homes, which can be very expensive. Ridding a house of its drywall and wiring, as the product safety commission recommends, can cost $100,000 or more.

Three U.S. senators -- Bill Nelson, D-Fla. and Virginia Senators Mark Warner and Jim Webb -- along with Virginia Congressman Glenn Nye first began asking the IRS to offer such a deduction in June 2009, and have written additional joint letters since then. Webb also filed amendments to two separate bills that would have required the IRS to offer the casualty loss deduction -- but the amendments weren't included in the final legislation.

"This is welcome and long overdue news," Nelson said. "This tax relief is just another important step to help drywall victims piece their lives back together."

On Wednesday, the day before the IRS made its announcement, Warner called Commissioner Doug Shulman and urged him again to take action, Warner's spokesman said.

"This is a key step forward in our efforts to provide some measure of relief to homeowners who have been struggling financially due to contaminated drywall issues," Warner said in a statement after the IRS announcement. "Our office continues to work individually with Virginia families, including intervention with their mortgage lenders, and we will continue to look for ways we might be helpful to these families."

Webb said the IRS action was "an important step forward for thousands of American families whose homes have been contaminated with Chinese drywall."

"I have heard directly from my constituents about the emotional, physical, and financial hardship they continue to face as they struggle to maintain payments on houses that have been rendered uninhabitable, while also paying for a place to live and often dealing with corresponding health issues," Webb said in a statement. "I will continue working to ensure that those affected receive the necessary federal attention."