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Statute of limitations key factor if contractor’s work is shoddy

DEAR BENNY: We built a vacation home in 1989. We recently discovered that the contractor made some serious errors in construction.

Evidently he used poor flashing and waterproofing techniques. We hired another contractor recently to assess the situation. The result was that we had to tear down and rebuild a significant part of the home at great cost.

We contacted the original contractor, who has told us that he has no liability and that the statute of limitations will prevent us from recovering any of our costs from him. Our insurance company says that because the damage was due to contractor error and is long-term damage, it has no responsibility either.

Is the original contractor correct in that he is protected from any action we might take against him? Any other suggestions you might have would be much appreciated.

If I have no way to recover some of the cost from the contractor or the insurance company, do you know if I can at least claim this as a casualty loss when I file my tax returns this year? – Joe

DEAR JOE: Every state has adopted what is known as a “statute of limitations.” This means that after a certain number of years, you lose your right to file suit.

The time limitations may differ on the type of claim. For example, suing for libel may be only one year, while suing for breach of contract may be three years.

There is a public policy involved here: If you wait too long before you file suit, it will be difficult to recreate or even remember the facts. In other words, “Use it or lose it.” You have to talk to your attorney about the limitations period in your state.

But there is a significant exception, called the “discovery rule.” If you suddenly discover a problem that you could not have learned before the statute of limitations expired, you may still be able to file suit. Again, since state laws differ, your attorney should be able to advise you whether you still have the right to file.

Can you claim a casualty loss on your tax returns? Probably not. In order to have such a loss, the event must be sudden, unexpected or unintended. And although your loss may have been unexpected, I doubt that the IRS would accept your claim.

DEAR BENNY: Regarding the repeal of the “stepped-up basis” referred to in your recent column (regarding beneficiaries of inherited homes), would the repeal also apply to a home where the deceased had a life-estate interest in the home? – George

DEAR GEORGE: As you know, this year there is no stepped-up basis.

Prior to this year, if the decedent owned a life interest in the property, his life interest expired when he died and there would be nothing to step up. The remainder beneficiaries would not receive any step up based on the death of the life tenant. They received the property with a basis that is the value of the property when the original owner from whom they inherited the property died.

This year (and no one knows what Congress will do about this issue) “step-up” is replaced by “carry-over basis” rules. Oversimplified, this means the basis of inherited property remains the same as it was for the deceased owner.

In other words, the basis is the lesser of market value on date of death or the deceased owner’s basis. However, heirs can increase that basis up to $1.3 million (or up to $3 million for property passing to a surviving spouse) but in no event more than the appraised value on the date of death.

Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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