The Green Mission Inc. is excited to announce our expanded best-practice protocol for deconstruction appraisal production. In light of two recent cases that disallowed tax deductions for deconstructed properties, we have researched and analyzed IRS codifications and USPAP regulations to produce appraisals with appropriate documentation and valuation substantiation on the front and back end of production. We have implemented more rigorous standards in developing our preliminary estimated value range.
Case Background
The cases Mann v. US, January 2019 and Loube v. Commissioner, January 2020 demonstrate the disallowance of deductions when the appraiser fails to accurately document, value and even fill out tax form 8283 correctly. When producing USPAP-compliant appraisals to substantiate federal and state tax valuations for estate, gift or charitable contributions, the Sales Comparison Approach should be primarily used. Should comparable sales data not be available, the Cost Approach can be used. However, the appraiser must substantiate, in their opinion of value, why they opine that the material or property has value devoid of comparable sales data. In Mann and Loube, material costing software called RS Means was used, with arbitrary depreciation applied, which resulted in inflated valuations. This software’s usage is meant to provide new construction costing estimates by geographic region not as a database for calculating used materials and property valuations. Additionally, misuse of the Cost Approach through use of software like this, takes very little time. Producing an appraisal with the correct Sales Comparison methodology takes approximately 80-90 hours of office time for an average residential structure. Utilizing RS Means software could take anywhere from 15-120 minutes.
Changes to Preliminary Quoted Values
We have raised the bar when producing our preliminary estimate of a deconstruction project's quoted value range. In an internal database, we now include a comprehensive list of all materials and personal property that can be salvaged and donated from a project. The following steps are now implemented:
- 1.Our team reviews the information from our inspection of the property or from photographs provided to us. Each material or piece of personal property that can be salvaged from the project is input into our database with cross-referencing to the photographs. We research comparable sales data points for each material or property and store the comparable sales data points within our database. An estimated value range is produced based entirely upon line-item valuation datapoints and without any estimations or simple square-footage calculations. Our research and data trials indicate that square-footage estimation is overly general and produces unreliable value ranges. For example, smaller homes with large amounts of high-quality materials and property sometimes have much higher square-footage calculations than a large home with minimal materials to be salvaged due to lower-quality of materials or damage.
- 2.This detailed list will then be sent to the nonprofit and/or deconstruction contractor to confirm that each item will be donated and to remove any that will not. The provided list does not include valuation data to ensure neutrality by the nonprofit and deconstruction contractor with regard to materials salvaged.
- 3.Our team will provide an estimated value range based upon the final list, vetted by the nonprofit and/or deconstruction contractor, which includes additions or deletions from the above-referenced step. We provide this service to client’s free of charge but we retain the internal database files until after client engagement.
- 4.The client will have a complete understanding of how values are derived for every item they are donating, ensuring complete transparency. Additionally, their CPAs and tax attorneys will understand the composition of the deduction by line-item with cross-referencing to comparable sales data and photographs for substantiation once they receive the final appraisal.
- 5.Providing the initial detailed list to the client, deconstruction contractor and nonprofit will provide a streamlined process. Full documentation and substantiation will occur from the front-end to the final appraisal production. Should a client’s deduction come under review, the taxpayer will be prepared with substantiation of every value with corresponding pictures and comparable sales data.
Reliable Appraisals
Our appraisals are all USPAP compliant—when producing appraisals to be used for tax value substantiation they must be. The database and documentation we produce within the appraisal and our internal work-file provide the substantiation the client, their CPA and tax attorneys need to feel confident when taking the deduction. Given the alleged and actual abuses in deconstruction appraisal valuations, it is critical for our industry to self-regulate, raise the bar on practices and protect this environmentally-friendly tax provision.
The deductions must remain in force. Their ability to act as an incentive towards achieving C&D waste diversion remains a critical factor in moving clients away from demolition and towards deconstruction. The Green Mission Inc. is committed to incorporating our team's expertise of tax law, deconstruction management and appraisal production to ensure accurate appraisals with full documentation and substantiation when reviewed by the IRS.
We look forward to working with our fellow industry leaders to promote waste diversion and sustainable building practices.
Please contact our Director of Business Development, Jennie Lumpkin, to review your next deconstruction and donation project: Jennie@TheGreenMissionInc.com
