In recent years, it has become fashionable to purchase a small home on a large lot, then destroy the building and construct a “McMansion.” Under the tax law, demolishing an existing home is not deductible.
However, cleaver taxpayers have found a loophole that permits them to raze the home and obtain a charitable deduction in the process.
Donating the Home
It turns out that fire departments need homes to test their equipment, practice search and rescue and hone their fire-fighting techniques. Putting the two together, taxpayers donate the unwanted home to a fire department and claim a charitable deduction for its value.
The fire department then torches the structure for training and testing purposes.
IRS is not happy about this arrangement and has denied taxpayers a charitable deduction, stating taxpayers received a substantial benefit by having the home demolished.
IRS has also asserted that because the taxpayers did not donate the land, there was not a gift of the entire property – a potentially weak argument, since taxpayers claim a deduction only for the building.
In one case, the Tax Court ruled in favor of a taxpayer in just this situation, stating,
the benefit flowing back to [taxpayer], consisting of clearer land, was far less than the greater benefit flowing to the volunteer fire department’s training and equipment testing operations.
Donating a home to a fire department makes sense only if the state allows the destruction of the entire structure and the fire department accepts it as suitable for training.
Expect Congress to eventually step into the fray and side with IRS, but for now, burning down the house may generate a significant tax break.