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The Roof! The Roof! The Roof Is On Fire!

The IRS is in court in two states, fighting some taxpayers who claimed deductions for donating their homes to their local community. And it raises some interesting points.

Every now and then, people decide that they just want to tear down their home entirely and start from scratch. But that kind of demolition is expensive. So what some clever people have done is figured out how to get their town to do the dirty work for them -- by offering up their homes to local police and fire departments.

This is a great deal for those public servants -- here are actual, real-world homes that they can train in for real. Police can practice real-life raids, hostage situations, domestic disturbances, and whatnot in a real setting. And firefighters get a building they can set on fire, extinguish, blow up, and bust apart to their hearts' content. The value of this (along with the -- let's admit it -- sheer fun) is immeasurable.

And when they're done, the house is GONE. The previous homeowner has a nice, vacant lot (some towns even agree to haul off the debris) for their new property.

The problem that is arising is that some homeowners are claiming the value of the destroyed home as a charitable donation to their town. They simply list the last appraised value of the building as the amount of the deduction off their taxes.

The IRS has a slightly different perspective. At the moment of donation, they say that the house is a "negative asset." While it might be worth, say, $200,000 if it was sold, the owner is actually getting a benefit in exchange for the gift -- he's saving the cost of demolishing that house.

It pains me to say it, but the IRS has a bit of a point. These homeowners are "double-dipping" and trying to work the system -- to not only save the demolition costs, but take a hefty chunk off their taxes as well.

But on the other hand, the benefit to the local community is tremendous. The training an experiences their first responders get in the process of demolishing the house (in a really, really fun way) is very likely to help save lives in the future. It would have cost the community a lot of money to build an equally realistic training structure -- and very few would do that, anyway.

My suggested compromise? The homeowners can take a portion of the house's value off their taxes, but not the whole amount. The percentage is negotiable, but I'd say 25% is a fair amount.

The notion of tax deductions for charitable donations is to encourage people to be charitable -- to help out the needy and do good deeds, so the government doesn't have to. Giving folks a break who offer up their homes for this kind of destruction seems, to me, a pretty good investment in tax breaks.

And pretty much anything that cuts down on the amount of money the federal government takes from its citizens seems, to me, to be a good thing.


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Comments (22)

They simply list t... (Below threshold)
Anon Y. Mous:
They simply list the last appraised value of the building as the amount of the deduction off their taxes.

Don't appraised values usually include both the building and the land? I'd be interested in reading more about these two cases. Got links?

Our town pays for demolitio... (Below threshold)
tarpon:

Our town pays for demolition ... We had one such house on our block. I think it's fair to claim demolition costs as a public charity donation, but not the full sale price. Demolition costs would make it a no tax deal.

They do have one guy in town that claimed sale price charity, and he is in trouble according to the news paper.

Even a demolition can recover the costs by selling things to a scrap and used dealer ... doors windows, fixtures, appliances ... When the police get done, nothing much is usable.

Got another for you JT. Do... (Below threshold)
GarandFan:

Got another for you JT. Don't know it it's still going on or not, but at one time millionaires would buy a 'precious gem' for a couple million. They'd sit on it for a couple of years then call in an "appraiser" and pay X for their expertise. The 'appraiser' would declare the item now worth 5 or 10 times the original price, pocket their fee and leave. The millionaire would then contact a museum and offer his 'precious gem' as a "charitable" gesture so that the poor could come and enjoy it's beauty as well. The museum would get a nice rock for free, and bragging rights on how much it had been 'appraised' at. And the millionaire would laugh his ass off while filling out his IRS 1040. Ain't 'charitable donations' lovely?

I disagree somewhat with yo... (Below threshold)
Bill Long:

I disagree somewhat with your analysis. It could be that the house truly is a "negative asset" being worth more if leveled. But in many of these cases, I think the homeowner would simply rather have a nicer, newer home, so the home value TO THE HOMEOWNER is negative, but the market value of the house is far, far from negative. Other buyers may very well be willing to buy the property and live in the house. Indeed, I assume that the local taxing authorities are requiring the homeowner to pay substantial ad valorem taxes on the home.

I think the owner should be... (Below threshold)
Studley:

I think the owner should be able to deduct the cost of what demolition would be although this could lead to abuse too. 25% seems a bit low, but on the right track. Good story and analysis.

A couple of points:F... (Below threshold)
codekeyguy:

A couple of points:
First, the IRS NEVER,NEVER goes to trial if there is a chance of losing. They always go for the slam-dunk.
Second, Every once in a while, the Tax court judges really p*ss off the IRS by coming up with a "reasonable compromise" (like JT's %of value) which sets a prescedent. Then the IRS only agrees to follow it in the district of the ruling.
Finally, the IRS, like all the states before them, are starting to get very greedy, wich does not bode well for the average taxpayer. (they have to collect enough to pay Obama's spendthrift ways)

Get rid of the IRS as it cu... (Below threshold)
JustRuss:

Get rid of the IRS as it currently exists all together by moving to the Fair Tax. No longer would you be able to get out of taxes by "working" the system.

Instead everyone pays taxes on only what they buy. And only the first time you buy it.

Build or buy a newly built multi-million dollar house? Pay only one time up front the 18 or 20% sales tax. When you sell that home the new buyer only pays property taxes, not sales tax.

Buy a new car? Drive offs would pay the 20% sales tax and when they sold it new buyers only pay the property tax not the sales tax.

Buy a candy bar or cigarettes? Pay 20% taxes on it.

All of your hard earned money goes directly to you rather than being taxed, the taxes are recouped when you buy something with that money. If you save that money it makes everyone elses money worth more by deflating the market.

State and Local should go to a fair tax as well to make it work effectively but you could still impose additional taxes on large purchases (like over $10,000).

And the poor would get a pre-bate check every year to help offset the costs rather than a rebate after they paid taxes all year.

It works, I have explained it poorly. If you want more info visit http://www.fairtax.org

PS this is not a "flat tax" so don't bring those arguments to the table.

Get rid of all the loopholes and tax evasion techniques, get rid of the IRS!

As Jay touched on, the issu... (Below threshold)

As Jay touched on, the issue is determining the FMV of the item being contributed and FMV is most commonly set as the amount one person would freely pay the owner for the item in question and the value the owner would accept for his property. Obviously the town isn't going to pay the homeowner even 25% of the previous value of the house to be able to burn it down. Thus, why give any deduction, as homeowners are willing to 'give' it away without the deduction? Doesn't that indicate a value to the homeowner of zero?

JustRuss, the fair tax doesn't eliminate the need for the IRS, it simply replaces one tax system for another. The IRS isn't the tax code itself (although you seem to think it is), it's the record-keeping and enforcement agency. There still would be a need for enforcement in a fair tax system (to guard against fraud), there would still be rules to decipher (what counts as new and what is used? what counts as business use? what counts as the final purchase?) and there would still be the need for an agency to keep track of what was being collected and paid and the money to be sent out in the form of those pre-bates.

I sure hope no one gets the... (Below threshold)
epador:

I sure hope no one gets the idea of donating the White House to ACORN.

epador - "I sure hope n... (Below threshold)
Marc:

epador - "I sure hope no one gets the idea of donating the White House to ACORN."


Pssst, don't look now but, that may have happened already.

"I sure hope no one gets th... (Below threshold)
GarandFan:

"I sure hope no one gets the idea of donating the White House to ACORN."

LMAOROTF!

Being a rural volunteer fir... (Below threshold)
Bob Aldis:

Being a rural volunteer firefighter,I can attest to the value of this kind of training. However, the days of donating houses to public safety are just about over. State and federal EPA regulations require the removal of toxic producing materials such as shingles and anything with asbestos. The cost and paperwork involved are prohibitive. We still get "on the job training" when an asbestos laden home catches fire.

The fairest way to do it is... (Below threshold)
Andy T:

The fairest way to do it is to let them deduct the value of house less the estimated cost of the destruction and hauling. That would accurately reflect the true 'donation', and would avoid assigning arbitrary numbers to what you can deduct as a percentage of value. Obviously, people are not deducting the value of the land.

@Bob Aldis:That wo... (Below threshold)
Captain Ned Author Profile Page:

@Bob Aldis:

That would be the asbestos shingles on two sides of my house.

Amusing Training Fire Anecdote: One of my previous bosses lives a mile down the road, right next to the local volunteer firehouse. He inherited the property complete with the dilapidated house, so he struck up a deal with the fire company to burn it down. The fire company put a bit too much "starter" in the house and the pall of smoke was visible for miles. It caught so fast and so intensely that the fire company didn't get the protective water curtain (to block the radiant heat for those who're wondering) up in time and all of the brand new vinyl siding on the firehouse melted. My old boss made a sizeable charitable donation to the fire company.

As for the posed question, full appraised value always includes land, so that's not the right number. However, appraisals are always supposed to provide an estimate of the land value's contribution to the overall values, so I'd be happy with 25%-40% of solely the calculated structure value

I said I explained the Fair... (Below threshold)
JustRuss:

I said I explained the Fair Tax poorly thus I provided the link. The IRS would still exist but not in its current form. And how hard is it to know what is "new" and what is "not new" ?

Unless you let the Democrats "nuance" the language.

JustRuss -The Fair... (Below threshold)
JLawson:

JustRuss -

The Fair Tax, to me, looks like the only way out of the current trouble we've got. The IRS sucks - and the cost of compliance sure as hell isn't figured into the total bite THEY inflict on the system.

And really, right now there's so many laws and exemptions and loopholes, it's ridiculous. It's time to simplify the system - but right now that complexity is the politicians' friend.

How is this any different t... (Below threshold)
Eric:

How is this any different than donating old clothes to Goodwill or an old car to a charity? In both cases, the person is willing to give the item away for nothing in return even though they still have some value left. Then they go buy new clothes or a new car for the now emptier closet and parking space...

Who do these people think t... (Below threshold)
Jeff Blogworthy:

Who do these people think they are? Charlie Rangle?

If the taxpayers are gettin... (Below threshold)
jpe:

If the taxpayers are getting a benefit, why should they get a deduction at all? If they benefit from the exchange, they'll let the fire departments use the houses whether or not they get the deduction.

First, the IRS NEV... (Below threshold)
jpe:
First, the IRS NEVER,NEVER goes to trial if there is a chance of losing. They always go for the slam-dunk.
We must be in different areas. I'm in estate planning, and the IRS regularly litigates cases where the merits aren't clear (the upshot being they lose quite a bit)
To estimate the market valu... (Below threshold)
Tina S:

To estimate the market value of a house one would have to estimate how much someone would pay for it if the land were not included.

jpe:If you are talki... (Below threshold)
codekeyguy:

jpe:
If you are talking about Estate cases, I agree that the Estate Tax Attorneys at the IRS do negotiate, before trial.
However, the function of the Appeals Division is to SETTLE 95%plus of the cases, and only +/- the top 2% ever goes to trial. And even then, the tax court judge will try to get them to settle among themselves.




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