Tax policy aligning with environmental initiatives is a wonderful and rare occurrence within the Internal Revenue Code. An individual may choose to deconstruct, or “un-build” a structure and donate the materials to charity, rather than demolishing the structure and sending materials to the landfill. When donated to a 501(c)3 charity or governmental entity, a tax deduction can be taken for the IRS defined Fair Market Value of the materials, fixtures, furnishings, appliances and other property incident to the deconstruction. These materials and property have solid value on the secondary retail “resale” market.
To take the tax deduction, an individual, pass-through entity, or corporation must obtain an IRS defined Qualified Appraisal by a Qualified Appraiser if the value of the donation exceeds $5,000. This simple stipulation, like all things tax, is not so simple.
Form 8283
A donor must submit IRS Form 8283 Noncash Charitable Contributions to substantiate the donation. The form was updated in December 2020 moving critical information found in Section B, Part I to the front page instead of hidden on p. 2. This section must be filled out by the taxpayer in its entirety:
This is one of the few IRS forms, that brings two additional independent party’s attestations onto an individual’s tax return form—the appraiser and the nonprofit. Both must sign the form on page 2 parts IV and V:
Bridging the Cost Gap Between Deconstruction and Demolition
The tax deduction can bridge the gap between more expensive and labor intensive deconstruction over the slash-and-burn demolition practices typically costing less. In fact, in our experience, close to 95% of residential homeowners who undertook deconstruction over demolition did so because of the tax deduction. Again, it is fantastic when tax policy aligns with sound environmental practices. However, these tax deductions are wrought with challenges and under-qualified appraisers put taxpayers at risk of losing these deductions in their entirety if the appraisal is not produced correctly.
No Licensure for Personal Property Appraisers
There is no licensure, either state or federal, for personal property appraisers. There are standards set forth by the IRS but the education and experience requirements have had the proverbial truck driven through them. Experience producing erroneous appraisals for decades does not an IRS Qualified Appraiser make. To practice as a CPA, I had to obtain a master’s degree and then sit for a two day grueling CPA examination, in four sections, which I am proud to say I passed all four on the first go-round, mostly because I never wanted to take that test again. Taxpayers have no such standard upon which they can judge an appraiser.
Personal Property Appraisal Organizations
However, there are three personal property appraisal organizations who sponsor the congressionally organized Appraisal Foundation, a nonprofit helping to heighten appraiser education and standards. They also promulgate USPAP, the Uniform Standards of Professional Appraisal Practice. At a minimum, ensure your appraiser is an accredited member of one of the following organizations. If they are not, ask them why. Sound valuation methodology reaches across appraisal disciplines and the foundational valuation concepts offered by these organizations cannot be learned without rigorous study and examinations.
- 1American Society of Appraisers (ASA)
- 2Appraisers Association of America (AAA)
- 3International Society of Appraisers (ISA)
What Makes an Accurate Appraisal?
Step One: Literal Description—The first step to be taken is for an appraiser to give a literal description of the donated property. Let’s take the example of a donated door. A literal description of the door would be:
Six-panel door, manufactured of pine and painted white, having a solid core with six beveled frames, devoid of hardware and without inclusion of the door jamb. Dimensions: 80”H x 36”W. The door is in overall good condition with noted signs of chipped paint along the bottom.
Step Two: Comparable Sales—The appraiser should present comparable sales to substantiate their concluded value. In this case, a comparable sale could be included with the following description:
Comparable 1: This is a sale of a similar six-panel door, also in pine but having an unfinished rather than painted exterior. The door has the same dimensions and is in used good condition, with similar wear evident along the interior edges. The sale occurred at Sample Retail on 12/31/20 for $105. The sale included antique style brass hardware including a knob and hinges as well as the door jamb.
Step Three: Adjustments to Value—The appraiser then makes adjustment to the comparable sale to conclude final value.
In concluding value, I considered this sale as relevant due to the following factors: The door is of similar dimensions and the lack of paint does not appear to affect value after a review of other comparable sales. The door is in similar condition to the appraised but requires adjustments downward due to the inclusion of hardware, hinges, and a door jamb. The sale occurred within close proximity to the effective valuation date. The appraised value is adjusted downward to $85.
Then, a copy of the comparable sale should be included within the appraisal.
This is a simple example. Some properties require the review of many comparable sales to conclude value with lengthy descriptions and detailing of comparable property characteristics. However, the valuation methodology, which requires researching consummated sales on the open market and making adjustments to value, is the same whether we are appraising this door or a Louis XVI fauteuil.
Additionally, current market conditions need to be researched and documented. This is especially pertinent in the economically volatile times in which we currently find ourselves. Modern art prices has proven to be inelastic on the auction market but furniture from the French Empire style has taken a dive. It is a great time to procure a Napoleonic Egyptian style bureau plat!
Additional Insights into Appraiser’s Qualifications
Some final suggestions when checking up on your appraiser: In what subject area did they complete their undergraduate and graduate work? Does it lend itself to a sound understanding of valuation theory? Do they engage in hyperbole or make false claims such as the following:
- 1Audit proof
- 2Never had an IRS Audit
- 3USPAP Certified
- 4Licensed appraiser
Pertaining to #1 and #2, a client gets audited not the appraiser. The IRS does not notify the appraiser when an appraisal is disallowed. A client may never notify the appraiser if they are audited and lose the deduction. Appraisers take a USPAP course and can be “USPAP compliant” but being USPAP Certified is not a thing. Like #3, there is no licensure for personal property appraisers.
Ask the appraiser if they are valuing property by studying the market and researching comparable sales. Unfortunately, many appraisers (whether they call themselves deconstruction, architectural reuse, or building material appraisers) plug numbers into construction estimating software such as R.S. Means or Marshall and Swift. Not only is this an inappropriate use of the software, it takes a fraction of the time compared to researching and documenting sales on the open market.
IRS Appraisals
Perhaps it is my nineteen years as a CPA that have drummed into my head that the IRS needs substantiation for everything. The appraisals we produce at The Green Mission Inc. are laid out like detailed research papers, walking the IRS through our evaluation of the current market and arguing our cases for the values we assign to every single piece of property. We leave nothing to the imagination.
Donating building materials, appliances, fixtures, furnishings and other home contents can be a tax savvy strategy to lower taxes while contributing to worthy organizations and keeping waste from landfills.
Contact our offices with questions about your potential deconstruction donation. We provide a quoted value range, without charge, based on a review of comparable sales, to help you make an informed choice when choosing deconstruction over demolition. We can also send a sample appraisal demonstrating our detailed and extensive research conducted for our clients.
Reference Links:
IRS form 8283 : https://www.irs.gov/pub/irs-pdf/f8283.pdf
IRS Qualified Appraisal and Qualified Appraiser criteria : https://www.irs.gov/publications/p561
The Appraisal Foundation : https://www.appraisalfoundation.org
American Society of Appraisers : https://www.appraisers.org
Appraisers Association of America : https://www.appraisersassociation.org
International Society of Appraisers : https://www.isa-appraisers.org
