Tax Deductions for Building Materials - the ins and outs of the process

What is deconstruction?

The word deconstruction is popping up around the country as society seeks to increase environmentally and socially responsible building practices. Deconstruction is the dismantling of a structure with the intent of salvaging materials and property that can be given a second life. An example of materials included from a typical inventory include:

• 1
  Framing lumber
• 2
  Hardwood floors
• 3
  Kitchen cabinetry
• 4
  Interior and exterior doors
• 5
  Appliances
• 6
  Furnishings
• 7
  Crown moulding and wainscoting
• 8
  Millwork
• 9
  Masonry
• 10
  Mantels
• 11
  Bathroom vanities
• 12
  Plumbing accessories—faucets, tubs, sinks, and showers
• 13
  Air conditioning condensers
• 14
  Hot water heaters
• 15
  Decking materials
• 16
  Slate roof tiles

Once removed from the structure, these materials can receive a second life by incorporation into existing structures or in building a new structure. Not only this is environmentally responsible but the quality and vintage characteristics of the property enhance the aesthetic appeal of materials in projects. It also saves a lot of money.

How does the tax deduction work?

Taxpayers can deduct the IRS defined Fair Market Value of the donated materials as an Itemized Deduction on their Schedule A or as a Charitable Contribution on their 1120 if they are a corporation. Pass-through entities take the deduction at the personal income tax level.

• 1
  To take the deduction for Non Cash Charitable Contributions a taxpayer must itemize deductions (1040 Schedule A) as opposed to taking the standard deduction. With the Tax Cuts and Jobs Act (TCJA) the standard deduction was significantly raised. For 2021 the standard deduction will be $12,550 for single taxpayers, $25,100 married joint and $18,000 head of household. The taxpayer needs to ensure that they are above the standard deduction before including the value of the charitable contribution. For example, if your itemized deductions come in at only $14,000 before taking the charitable contribution, the net tax value of the donation will be less than if you had already exceeded the standard deduction threshold. Keep in mind the following categories that comprise the Schedule A, Itemized Deductions:
  • a
    Medical Expenses—Only included when they exceed 7.5% of Adjusted Gross Income (Congress recently acted to reduce this from 10% to 7.5%.) This is rarely taken by taxpayers as it is a significant AGI hurdle to cross and typically only taken by taxpayers with high deductible insurance and/or significant medical expenses.
  • b
    State and Local Taxes (SALT)—Now capped at $10,000. This includes state income taxes paid and local property taxes including real estate and personal property. For a taxpayer who paid $23,000 in SALT, they lose $13,000 of the deduction and are capped at $10k.
  • c
    Mortgage Interest—Capped at interest on a mortgage loan less than $750k post 2018, $1M pre 2018.
  • d
    Charitable Contributions—Cash contributions are permitted up to 60% of AGI with a five year carry-forward and Non Cash up to 50%, with the same carry-forward. Please note that 2020 cash contributions had the floor raised to 100% of AGI as part of the CARES Act.
• 2
  What is the value of the Non Cash Charitable Contribution? If the donation is being lopped on top of the starting point for the standard deduction, it is worth the taxpayer’s Effective Tax Rate. This is the same as the average tax rate. Please note it is not the Marginal Tax Rate, which is the highest income tax bracket hit. Also, please note that most states allow an itemized deduction for charitable contributions but a few do not including any state with a 0% state income tax rate and the following states: Connecticut, Illinois, Indiana, Massachusetts, Michigan, New Jersey, Ohio, Pennsylvania, Rhode Island, Tennessee, and West Virginia. If you live in Virginia and have a federal effective tax rate of 20% and a state tax rate of 5%, each dollar of contribution will reduce your taxes by $.25.
• 3
  What tax forms are required for taking the deduction? If the donation of materials is in excess of $5,000 then the IRS requires an IRS defined Qualified Appraisal by an IRS defined Qualified Appraiser. The taxpayer must remit IRS Form 8283, which must be filled out by the client in its entirety and signed by both the nonprofit and the appraiser. Please note case Loube v. Commissioner, the deduction was disallowed when the taxpayer did not properly full out the form and the appraiser forgot to sign.
  Here are the portions of the form the taxpayer must ensure are filled out correctly:
  
  
  
  
  
  
• 4
  What is IRS defined Fair Market Value? Like all IRS definitions, this must be followed with exactness. Fair Market Value is defined in Treasury Regulation §1.170A-1(c)(2) as,
  The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. If the contribution is made in a property of a type which the taxpayer sells in the course of his business, the Fair Market Value is the price which the taxpayer would have received if he had sold the contributed property in the usual market in which he commonly sells, at the time and place of the contribution and, in the case of a contribution of goods in quantity, in the quantity contributed. The usual market of a manufacturer or other producer consists of the wholesalers or other distributors to or through whom he customarily sells, but if he sells only at retail the usual market consists of his retail customers. If the donor makes a charitable contribution of property, such as stock in trade, at a time when he could not reasonably have been expected to realize its usual selling price, the value of the gift is not the usual selling price but is the amount for which the quantity of property contributed would have been sold by the donor at the time of its contribution.
  This definition requires the appraiser to determine the value based upon actual market data procured from secondary retail sales and offers of sale. Personal property appraisal organizations call this approach the Sales Comparison Approach. The values must be tethered to these comparable sales to accurately value the materials.

What makes an appraiser qualified?

The IRS provides educational and experience qualifications outlined to ensure competency. However, there is no licensure, either state or federal, for personal property appraisers. However, there are reputable 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 expect and demand the following standards from your appraiser:

• 1
  Review the appraiser’s CV to ensure they have undergraduate and preferably graduate education credentials in a field in which valuation theory and processes are firmly understood.
• 2
  Ensure your appraiser is an accredited member of one of the three personal property organizations:
  • a
    American Society of Appraisers (ASA)
  • b
    Appraisers Association of America (AAA)
  • c
    International Society of Appraisers (ISA)
  Simply paying a yearly membership due without taking the rigorous courses, examinations to become accredited. In addition, accredite members have their appraisals reviewed by the organization and they must pass to receive accreditation.
• 3
  Request a sample appraisal and look for the following:
  • a
    Thorough market analysis that is up-to-date and relevant
  • b
    Adequate descriptions of the property
  • c
    Inclusion of comparable sales data in the analysis of all valued property
  • d
    An explanation of how the appraiser came to the concluded value. Simply plugging in a value does not suffice.
  • e
    Inclusion of photographs of all donated property
  An appraisal should be a show-piece for an appraiser and they should be eager to provide you with a sample. Be wary of an appraiser unwilling to do this.
• 4
  Watch for warning signs from appraisers claiming to be:
  • a
    Audit proof
  • b
    Never had an IRS Audit—Impossible for the appraiser to know since the taxpayer is only notified should the return go to review and the appraisal be deemed unqualified
  • c
    USPAP Certified—Not a certification
  • d
    Licensed appraiser—No such license exists
• 5
  Check for relevant case law. The case Mann v. US, decided on summary judgment in January 2019, determined the appraiser’s appraisal to be unqualified. The case went to appeal and again the court deemed the appraisal to be unqualified and went further to state that the appraiser used the Cost Approach to value, without the value being rooted to actual market sales. The appeal was recently decided in January 2021.
• 6
  Deconstruction appraisers also go by the name of Reuse Appraisers and Architectural Salvage Appraisers. These are all the same type of appraiser. The bottom line is that these appraisers are all personal property appraisers, who provide values for generally depreciating property. Some have started organizations claiming to be working to shore up the industry but have websites either thin on research and content or non-existent. Taxpayers and their CPAs can quickly do their homework and determine which appraisers produce legitimately valued appraisals. If choosing an appraiser from such a self-proclaimed “national organization,” check their website for scholarly research and content. If the website is found not to exist, request research and articles from the organization’s founders.

How does one get started on a deconstruction donation?

At The Green Mission Inc., the following steps are taken in procuring an appraisal for donated materials:

• 1
  Call or email our Director of Business Development, Jennie Lumpkin, to start the process. Jennie has a decade of experience in the industry and can walk the client through the process. Jennie@TheGreenMissionInc.com (540) 322-3884
• 2
  Provide initial site photographs, if available, or schedule an inspection with one of our team members. During that process, we will capture photographs providing sufficient detail upon which we can properly identify the property, determine the materials, gauge the condition, and begin our research of comparable sales to collect market data.
• 3
  Within 24-48 hours of receiving the photographs or completing our inspection, we provide a detailed inventory list of every material and piece of property to be donated. The client reviews the list for accuracy and removes anything they do not wish to donate.
• 4
  We research comparable sales and provide an aggregate donation estimated value range for the donation.
• 5
  The client chooses a charity or governmental organization to whom they would like to donate.
• 6
  We send the spreadsheet of potentially donated items to the nonprofit to see if they will accept the donation. If they cannot accept the entire donation, the client may choose additional organizations willing to accept the donation.
• 7
  The client signs an engagement letter with our company.
• 8
  After receipt of the contemporaneous letter of acknowledgement from the receiving organization, we begin our research of comparable sales and the writing of the appraisal.
• 9
  Our goal is to have the appraisal to the client within 4-8 weeks after receipt of the donation acknowledgement but can adjust that timeframe should at tax deadline need to be met.
• 10
  We remit our appraisal and signed Form 8283 to the client. The client may choose to have their appraisal shared with the receiving nonprofit. We strictly follow USPAP’s confidentiality requirements and ensure the client wishes to share the appraisal.

Please visit our website for more information on our processes, research on the industry, and information about our team.