In IR 2010-102 (Sept. 30, 2010), the IRS announced that damages from corrosive drywall would be able to be treated as a casualty loss, and in Rev. Proc. 2010-36, there is a "safe harbor" formula for determining the amount of the loss. The Rev Proc also provides a link to the Drywall Information Center, for guidance on identifying problem drywall.
The drywall, manufactured in China, has high levels of hydrogen sulfide and can result in corrosion of copper in appliances and wiring and high levels of gas. If a taxpayer doesn't have an existing or potential claim for reimbursement, the casualty loss is the unreimbursed repair cost; if there is a claim, the taxpayer may take 75% of the unreimbursed amount. Amounts that increase the value of the house above its pre-loss value are not counted as part of the casualty loss. Depending on the actual amount of the reimbursement, the taxpayer may have income or an additional deduction in the year of the reimbursement. There are of course additional limitations to casualty loss claims: only taxpayers who itemize may take casualty losses, the first 100 of the loss is not deductible, and the loss is only deductible to the extent that it exceeds 10% of adjusted gross income.