What is Deconstruction?
Deconstruction is the careful dismantling of a structure with the intent to salvage and reuse the materials and property. Valuable property is kept out of the landfill reducing the construction industry’s carbon footprint and property can be reused and repurposed by providing affordably priced materials.
However, deconstruction can be more costly than a simple demolition due to the additional time and labor needed to complete the project. A tax deduction is available equaling the Fair Market Value of the materials, when donated to a charity or governmental organization, for taxpayers and pass-through entities with Itemized Deductions on their 1040 Schedule A or corporations on their Form 1120.
What is a Deconstruction Appraisal?
Critical to this deduction is an IRS-defined “Qualified Appraisal” produced by an IRS-defined “Qualified Appraiser” for any donation with a value greater than $5,000.
Where do I find an IRS Qualified Appraiser?
Prior to our company opening in 2019, there were only a handful of deconstruction or reuse appraisers with two or three producing an estimated 90%+ of deconstruction appraisals nationwide over the past few decades.
The IRS provides detailed guidelines for compliance with their qualification rules. It is up to the taxpayer to do their homework on who is and who is not qualified.
Here is a link to the Internal Revenue Code outlining the requirements:
https://www.law.cornell.edu/cfr/text/26/1.170A-17
It seems like every few weeks we are contacted by CPAs and taxpayers who have had issues with deconstruction appraisals. Whether the deduction was disallowed, and they lost their deductions, or the CPA saw the appraisal and it left more questions than answers. The most common reason the deduction is disallowed is because the appraiser is not qualified. The following issues are what we see most often in these appraisals that are not qualified.
CV contains false information
The appraiser has been precluded from preparation due to a Circular 230 violation (more on that later)
The appraiser does not have the required education and experience
The appraisal does not include adequate descriptions, documentation of comparable sales, and photographs
The wrong valuation methodology is used and/or the appraiser had no idea what they were valuing
Can an Appraiser Really Have Insurance Protecting a Taxpayer from Audit?
Recently, some have claimed to have an insurance policy that would protect any client from the adverse effects of an audit stemming from an appraisal firm’s produced appraisal.
Our staff spoke with a number of insurance representatives for more information.
What type of insurance can appraisal firms carry? Typically, there are Errors and Omissions (E&O) policies providing professional liability insurance. This policy is triggered if there is a lawsuit or claim. This means that the appraisal client who is audited and ends up losing their tax deduction must file a claim or a lawsuit against the appraisal firm to potentially recoup any financial losses. A simple lawsuit costs around $10,000 just to get started. The average fees for an attorney are from $200 to $500 an hour. More complex litigations can cost in the six figures.
Under an E&O policy, the losing taxpayer must file a complaint or suit against the insured and incur the costs of the litigation and trial.
Most importantly, these policies cover the insured (appraiser or policyholder) not an unrelated (taxpayer/client).
Insurance representatives opined that such a policy could only be instated for a very large company, with millions in assets, and suggested clients ask the insured for a copy of the policy to see if this coverage exists.
Additionally, the insurance company representatives, with whom we spoke, said it would be highly unlikely that an insurance company would just open their pockets and pay a neutral third party (the taxpayer) to make them whole due to an error by the insured.
Finally, even if a policy like this existed, there would be a deductible. Is the insured ready to pay the deductible for any client who is audited because of an unqualified appraisal?
Should an appraiser present such an insurance policy to a client, the following questions, at a minimum, should be asked and answers documented, and the insurance policy examined:
Does an insurance policy exist that can guarantee an appraisal client is protected 100% from any adverse financial events should their return come under audit and the underlying appraisal be deemed non-compliant?
Will this same insurance policy cover accountant and attorney’s fees to the client undergoing the audit?
What about the underpayment fines and fees incurred by the taxpayer? The audit will most likely occur a year or more after filing and, once the deduction is disallowed, the taxpayer will have underpaid their taxes. In many cases, they may have SUBSTANTIALLY underpaid their taxes and have additional fines and penalties.
Per the point above, what coverage does the insurance policy cover for taxpayers who now find themselves in a hotbed of IRS inquiries? The IRS may review not just the lost tax deduction, but other areas of their return.
What About an Appraiser Claiming to Have a Proven Track Record with the IRS?
Right off the bat, determine if the appraisal firm was involved in the two precedent-setting Tax Court cases Mann v. US, 2019, and Loube v. Commissioner, 2021. These cases are presented by IRS Counsel at almost every personal property appraisal organization’s events demonstrating what not to do as an appraiser. In fact, they are the only two deconstruction-related Tax Court precedent-setting cases on record where the donor lost their tax deduction for deconstructed and donated property.
So, Again How Do I Find an IRS Qualified Appraiser?
Unlike CPAs, attorneys, CFPs, doctors and other professions, there is no state or federal licensure for personal property appraisers. Here is a good list of how to do your homework before hiring an appraiser.
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1.Ensure the signatory appraiser and owner of the appraisal firm has a college education commensurate with a firm grasp of underlying tangible asset valuation methodology and application.
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2.There are three personal property organizations sponsoring The Appraisal Foundation: American Society of Appraisers, Appraisers Association of America, and International Society of Appraisers. The accreditation track provides a solid educational framework in valuation methodology and personal property appraisal principles. Ensure the appraiser is an accredited member. Also, ensure they were not “grandfathered” into an organization prior to the IRS upping the educational requirements post 2018.
Search each site and determine if the appraiser is a member and accredited:
https://www.isa-appraisers.org/find-an-appraiser
https://myaccount.appraisers.org/Directories/Find-An-Appraiser
https://www.appraisersassociation.org/find-an-appraiser -
3.USPAP or the Uniform Standards of Professional Appraisal Practices are important standards for all real and personal property appraisals. However, simply passing the 15-hour USPAP class does not make an appraiser qualified.
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4.Ensure the appraiser and owner of a company are not precluded from practice under Circular 230. This includes those who have engaged in dishonest or disreputable conduct, people with felony convictions, etc. A simple background check software can easily identify those who might be in violation.
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5.The appraiser should be proud to show their work. We have contracted with clients since 2019 whose CPAs have reached out for guidance when a deconstruction appraiser refuses to provide a copy of their appraisal to the CPA. Even with the client’s directive, they have not done so. Every appraiser should be proud of the appraisals they produce. In fact, when our team produces appraisals, I encourage staff to present every detail as if providing information directly to an IRS Examiner. An appraisal we just reviewed this week was one page long for an inventory of materials from a full-house deconstruction. No comparable sales were shown, no valuation methodology explained and applied, no photographs, no descriptions, no USPAP certification, and it was generally not USPAP and IRS compliant, and could easily be rejected by the IRS as unqualified. Thankfully, the client’s CPA flagged it and reached out to us for a correction.
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6.Check websites. Ensure the company authors articles like this one, delving into the mechanics of personal property appraising. Look out for phrases claiming to be audit-proof or free from IRS issues.
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7.Make sure certifications and accreditations belong to organizations that rigorously test appraiser’s knowledge and review their written reports. Watch out for defunct organizations still listed on an appraiser’s CV with associated letters behind the name that might not equate with valuation education and examination. Ensure the certification is not to an agency where you simply attend a few seminars and can regurgitate that some type of work was done to further the “green” cause. This does not come close to the training in valuation methodology needed to be a competent appraiser.
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8.Importantly, producing appraisers for years, even decades does not an IRS Qualified Appraiser make if they are not qualified and the appraisals are not compliant.
Back to Deconstruction
Deconstruction continues to have a significant impact on decreasing the high volume of construction waste that has been entering our waste stream for years. Donating these materials to charity and taking a tax deduction should be encouraged. We ensure our clients receive a legitimate, well-researched, and complete appraisal.
Reach out to our team to discuss your deconstruction appraisal needs.
