Streamlining appraisals for the deconstruction industry

The exciting work of deconstruction continues across the country with Pittsburg being the latest city to adopt a deconstruction ordinance:

PITTSBURGH, PA (April 20, 2021) Today, Mayor William Peduto issued an Executive Order to create a unified, City-led deconstruction policy designed to remediate blight in city neighborhoods while diverting building materials from landfills, advancing climate action goals, promoting equity, and creating job training opportunities.1

Tax deductions for individuals, pass-through entities, and corporations may be taken on either the individual income tax form 1040 Schedule A as an itemized deduction, or as a deduction on the corporate income tax form 1120.2

The Green Mission takes pride in our appraisal work product, which closely follows all IRS, personal property appraisal organization and USPAP standards including:

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  A detailed description of the property in understandable terms.
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  Accurate quantities of materials donated.
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  A condition report for each material or piece of property.
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  Comparable market data captured from the relevant secondary retail market. This includes a description of each comparable sale and inclusion of the data within our report.
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  Evaluation of both the macro and micro economic market for the particular property and materials. For example, as most know, lumber prices are soaring and are reflected in higher reclaimed lumber prices on the secondary retail market.

Please see our latest article on the deconstruction and appraisal process.

Additionally, clients can protect themselves from unethical appraisal practices by following some commonsense guidance, including:

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  Check the tax court docket, especially cases Mann v. US, 2019, and the related appeal 2021, in which the taxpayer lost their deduction due to an unqualified appraisal, lack of inventory kept by both the nonprofit and the appraiser, and erroneous valuation methodology being used, which was cost new less depreciation using construction estimating software R.S. Means. The correct methodology is the market based or Sales Comparison Approach, where materials are valued based upon actual market data. Also, Loube v. Commissioner 2020, where the client, nonprofit, and appraiser did not properly fill out Form 8283 and had the deduction disallowed. IRS counsel, in multiple industry presentations, have stated that the appraisal would have been disallowed due to using the wrong valuation method and considered unqualified. The IRS was able to easily disallow the deduction due to lack of a completed 8283.
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  When pieces of a home are detached from the real property, they become personal property. The value of an intact real property structure is almost always of significantly higher value than as detached personal property. For a whole house deconstruction, if an appraiser is promising values of around $150,000 for a 1,500 square foot home, that is a valuation of $100 per square foot. Valuations that high are not based on market data and are grossly inflated. Finally, check the tax assessment records of the property. If a client receives an appraised value of $150,000 and the improvements are valued around the same level, something is terribly wrong with the appraised valuation.
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  Finally, ensure a complete and accurate inventory is kept by both the nonprofit and reviewed by the appraiser. Some valuations of a whole house deconstruction might include materials that are never salvaged and go straight to the dump. Including the value of materials on an appraisal that are not actually donated to a nonprofit does not follow Internal Revenue Code and slides into potential tax fraud territory.

It is wonderful when federal tax policies align with environmental aims. The Green Mission seeks to provide the highest quality and most thoroughly researched and documented appraisals in the industry.

Please reach out to our Director of Business Development, Jennie Lumpkin, to receive a complimentary estimate on the value of your potential donation.

Reference Links:

¹ https://pittsburghpa.gov/press-releases/press-releases/4881#:~:text=PITTSBURGH%2C%20PA%20(April%2020%2C,equity%2C%20and%20creating%20job%20training

² The Schedule A limitation is 50% of Adjusted Gross Income with a 5-year carryforward. Corporations are limited to 10% of net income with certain add-backs with the same 5-year carryforward