The Exciting Environmental Benefits of Deconstruction

Deconstruction is the process in which a building is taken apart, piece-by-piece, with the aim of salvaging and reusing as many materials as possible. The scope of a deconstruction project can be as small as a bathroom renovation or the dismantling of a larger residential or commercial structure.

In contrast, a demolition removes and disposes of all interior building materials, delivering them to a landfill. From a 2018 EPA study:

When clients choose deconstruction over demolition, materials and property such as appliances, cabinetry, light fixtures, windows, wood flooring, masonry, furnishings, and other building materials can be salvaged and reused.

The Finances of Deconstruction

By necessity, deconstruction typically costs more than demolition due to the additional time needed to carefully take apart a structure with the aim of preserving the salvaged elements—opposed to the break-and-dump processes of demolition. However, these costs can be offset through tax deductions.

Individuals, pass-through entities, and corporations may be able to deduct the Fair Market Value of the materials and property on their tax returns.

For individuals and pass-through entities, these deductions are taken on the Individual 1040, Schedule A: Itemized Deductions:

This deduction is limited to 50% of Adjusted Gross Income with a 5-year carry-forward.

Corporations may take the deduction on their corporate income tax return, Form 1120:

This deduction is limited to 10% of net income with the inclusion of specific add-backs, also with a 5-year carry-forward.

Appraisals

The IRS requires an appraisal for a donation of property with a Fair Market Value in excess of $5,000. At The Green Mission Inc., we specialize in such appraisals. Ensuring these appraisals are produced accurately and in line with Internal Revenue Code, relevant case law, personal property organization valuation principles as well as USPAP (the Uniform Standards of Professional Appraisal Practice) is critical to ensure client’s deductions can be substantiated and are not disallowed by the IRS.

Appraisal steps include:

• 1
  Determining the scope of the donation with the client and providing an initial estimated value range. We provide this at no cost.
• 2
  The client then ensures they qualify to take the tax deduction by consulting their CPA or tax professional.
• 3
  The client then chooses both a deconstruction team and a nonprofit or governmental entity to be the recipient of the donation.
• 4
  Once completed, the recipient organization provides a detailed receipt of all property received and accepted.
• 5
  We then produce an appraisal based upon that final inventory list.
• 6
  Our appraisals include the following elements:
  • a
    Complete description of the property with corresponding photographs.
  • b
    Analysis and selection of comparable market sales at the correct market level, which is typically secondary retail sales at auction or firm offers of sale by retailers of pre-owned materials, furnishings, and other property.
  • c
    An appraisal report following IRS, personal property organizations and USPAP guidelines.
  • d
    Our reports include both a macro and micro economic analysis of the current market for the materials.
  • e
    Additionally, our reports include all corroborating data upon which our values were concluded.

By the Numbers

As an example, assume a taxpayer has an effective (average) federal tax rate of 20% and a state tax rate of 5% for a combined rate of 25%. This also assumes that the state permits deductions for charitable contributions. Please refer to this site in footnotes for a complete listing.4

Donation: Kitchen cabinetry, high-end appliances, granite countertops, light fixtures.

Fair Market Value: $20,000

Net tax benefit: $5,000

Ensuring Compliance with the IRS

Recent case law has demonstrated the importance of hiring an IRS defined Qualified Appraiser. In the case of Mann v. US (2019)5, Loube v. Commissioner (2020)6, and the Mann appeal, lost by the taxpayer, taxpayers lost a substantial tax deduction and was required to pay fines and penalties as well as legal costs. The same appraisal firm was involved in both cases. From an article from The Tax Advisor:

Please contact The Green Mission Inc. to discuss your potential project and to start the appraisal process.

Reference Links:

¹ https://www.epa.gov/facts-and-figures-about-materials-waste-and-recycling/advancing-sustainable-materials-management

² https://www.irs.gov/pub/irs-pdf/f1040sa.pdf

³ https://www.irs.gov/pub/irs-pdf/f1120.pdf

⁴ https://www.uscharitablegifttrust.org/tax-treatment-of-charitable-contributions.php

⁵ https://law.justia.com/cases/federal/appellate-courts/ca4/19-1793/19-1793-2021-01-06.html

⁶ https://casetext.com/case/loube-v-commr

⁷ https://www.thetaxadviser.com/issues/2021/mar/no-deduction-donation-house-deconstruction.html