Can
you take a deduction for burning your house to the ground?
You
may laugh, but I was reviewing a recent case on this issue. It is the third
case involving a home barbeque I can remember over as many years.
The
case from 3 years ago was Rolfs v Commissioner.
It was – understandably – considered quite outside the box.
Theodore
Rolfs and his wife (the Rolfs) owned a house on a 3-acre lakefront property in Wisconsin.
The house was modest, built around 1900 and it would be fair to say that it was
in need of an upgrade.
The
Rolfs wanted to renovate, but the work required was so extensive that tearing
down the house and constructing anew was a very viable option.
They
estimated it would cost $10,000 to $15,000 to demolish the house and remove the
debris.
They
went a different path and donated the house to the fire department. There were
restrictions on the donation: the fire department was to use the house for
training exercises, with the understanding that the training would happen
shortly after the donation. The Rolfs donated only the house. They did not
donate the land on which the house sat.
The
Rolfs needed a value for their donation. They contacted Richard Larkin,
president of Larkin Appraisals, Inc. who valued the house at $76,000.
The
Rolfs donated the house and took a charitable deduction of $76,000 on their tax
return. They attached the appraisal report and a letter from the fire chief
thanking them for the donation.
The
IRS disallowed the charitable contribution.
The
IRS argued that a charitable donor does not expect a financial benefit in
exchange for the donation. The Rolfs however expected a substantial benefit: the
$10,000 to $15,000 in avoided demolition costs, for example, not to mention the
benefit of the tax deduction itself.
The
IRS further argued that the restrictions the Rolfs imposed affected the value
of any donation. The fire department could only use the house for training
purposes, and the house was to be destroyed shortly after the donation.
The
Rolfs countered that they had an appraisal for $76,000. And what was the IRS talking about with “restrictions?”
After the fire department did its thing, there was NO house standing. The fire
department did not want a house. They wanted a house they could burn to the
ground. Whatever “restrictions” the IRS was talking about went up in smoke.
The
case went to Tax Court.
In
a Solomonic gesture, the Court reasoned that there might be a donation, but the
amount of any donation would be the value of the house over the value of any
demolition and clean-up services received.
The
Court observed that the Rolfs donated the house without its underlying land.
This meant that an independent buyer would have to move the house. The house
was very old and badly in need of renovation. What would someone pay for this?
Not surprisingly, the house was almost worthless.
The
house was not worth more than the demolition and removal services received from
the fire department. The Court decided there was no donation. The Rolfs lost
their case.
But
they made the tax literature.
There
are variations that might have resulted in a different outcome. For example,
what if the house had enough value to make it worth the cost and effort of
moving?
There
is another way to help tax-subsidize a house demolition, however. Have you
heard of “deconstruction?” This involves dismantling the house rather than
razing it under a bulldozer. It is more expensive, but with deconstruction more
home materials remain in usable condition. The materials are then donated,
generating a tax deduction. If the value of the tax deduction exceeds the
additional cost of the teardown, one has effectively tax-subsidized his/her
demolition costs.
The
value of the materials can add up. I was reading an article where the lighting
fixtures alone were worth over $100 thousand. Can you imagine?
