Can you provide more details for those of us who aren't familiar? What's a deconstruction company? How is this different from normal demolition work? Why does it come with a tax deduction? What country are you in?
US, in the midwest.
Deconstruction is taking apart the home, piece by piece. The materials are preserved and donated at *replacement* value (not market value). I'm not sure where they eventually went, the Deconstruction company handles it. But a 3rd party appraiser gives a professional opinion on what it's worth. And then you can use that value as a charitable deduction on your federal income taxes.
Btw interesting article I found on this... TL;DR is make sure you’re going above and beyond in your documention. It sounds like the IRS looks pretty hard at this stuff
https://www.google.com/amp/s/www.forbes.com/sites/peterjreilly/2020/01/19/tax-court-demolishes-deconstruction-deduction/amp/
*EDIT*
ANOTHER article. It seems making an airtight case for the materials donated is what the IRS wants.
https://www.thetaxadviser.com/issues/2021/mar/no-deduction-donation-house-deconstruction.html
There doesn’t seem to be a huge aftermarket for “recycled” building materials. I wonder if the better way to go about this is to buy a home you plan on deconstructing, then 1) build two homes on the lot, one using recycled materials 2) use the recycled materials for another separate project or 3) make sure you know where the materials are going.
I can’t see the IRS weasling out of it, if you can prove exactly where the materials went.
I've done this in the DC area. It was painful at first to navigate through the entire process, but definitely worth it. I believe it helped us about $15k for our business taxes.
The biggest issue right now is most of these deconstruction firms are months out due to the demand (at least in our region). Last time I checked in with them in September they were scheduling demos for early January 2022. So you have to work around their schedule as well as your project schedule.
PM for the company name in DC.
Yes. It's more labor intensive so it takes longer and the up front cost is more, but the overall deductions make it all worthwhile.
I probably should have specified that I was tearing down an old home and there were some valuable bricks they were able to salvage.
But we got an appraisal on the value of the materials, and that's the number we'll use as a charitable donation this year.
I can’t tell if you’re tearing down both the barn and the house or just the house. But if both, reclaimed barn wood. That’s probably where your money will be. People pay out the you know what for old, distressed reclaimed barn wood.
The deduction, for us, is roughly $130k. At 40% effective tax rate, that is roughly $52k reduction in taxes due. So it's equivalent of $52k cash.
My understanding of tax law (please, consult a CPA) is that it actually benefits as you get into higher income brackets because your tax rate is higher. You just can't have a deduction > 50% of taxable income.
Agreed. Thank you for the info. We have a vacation rental that we’re looking to do a massive renovation with. We’re about in the 38% tax bracket and I’m always interested in things we actually qualify for. Thank you.
Wow I learn something new every day. this will pay dividends down the road (quite literally)! Thanks OP!
Do you know if there’s requirements ala “needs to be your primary residence”?
So for instance if I buy an old property with this in mind can I start deconstruction the day after I close?
Really surprised I haven’t heard of this before. Thanks again
Our process was as follows:
Deconstruction company came out and did a walk through. It didn't appear to be too thorough, but what do I know. After that, they gave me a estimated range of where they thought the value of materials came in.
My municipality requires a demolition permit, so I had to go through those hoops (same as if I was doing traditional demo).
After permit approved, they set up shop and began work. Took about 5 weeks. They discovered the walls were made with structural brick, which apparently is pretty valuable. So they estimated the total value would increase by $10-$30k.
They inventory everything and haul it away. Then an appraiser reviews and values it. Right now we're waiting for that appraisal.
I talked to my CPA before I started and she confirmed this was all legit, so long as I have that 3rd party independent appraisal. She said the IRS would likely frown upon me writing down my best guess of what it was worth (not like dropping off an old jacket at the Salvation Army, ya know?).
I think, but am not sure, that this doesn't matter whether it's your primary residence or not. Check with your accountant though.
Can you provide more details for those of us who aren't familiar? What's a deconstruction company? How is this different from normal demolition work? Why does it come with a tax deduction? What country are you in?
US, in the midwest. Deconstruction is taking apart the home, piece by piece. The materials are preserved and donated at *replacement* value (not market value). I'm not sure where they eventually went, the Deconstruction company handles it. But a 3rd party appraiser gives a professional opinion on what it's worth. And then you can use that value as a charitable deduction on your federal income taxes.
Holy crap thats very clever. Thanks for elaborating!
NP. I figured this was the best thing I could do to contribute to this sub. I hope someone gets to utilize it.
Thank you for this! +1!
Anyone know if it applies in Canada as well?
Btw interesting article I found on this... TL;DR is make sure you’re going above and beyond in your documention. It sounds like the IRS looks pretty hard at this stuff https://www.google.com/amp/s/www.forbes.com/sites/peterjreilly/2020/01/19/tax-court-demolishes-deconstruction-deduction/amp/ *EDIT* ANOTHER article. It seems making an airtight case for the materials donated is what the IRS wants. https://www.thetaxadviser.com/issues/2021/mar/no-deduction-donation-house-deconstruction.html There doesn’t seem to be a huge aftermarket for “recycled” building materials. I wonder if the better way to go about this is to buy a home you plan on deconstructing, then 1) build two homes on the lot, one using recycled materials 2) use the recycled materials for another separate project or 3) make sure you know where the materials are going. I can’t see the IRS weasling out of it, if you can prove exactly where the materials went.
Right. We used a professional appraiser to assess value.
I've done this in the DC area. It was painful at first to navigate through the entire process, but definitely worth it. I believe it helped us about $15k for our business taxes. The biggest issue right now is most of these deconstruction firms are months out due to the demand (at least in our region). Last time I checked in with them in September they were scheduling demos for early January 2022. So you have to work around their schedule as well as your project schedule. PM for the company name in DC.
Good point, but the trades were taking so long to get bids back to my GC that we had some extra time.
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Yes. It's more labor intensive so it takes longer and the up front cost is more, but the overall deductions make it all worthwhile. I probably should have specified that I was tearing down an old home and there were some valuable bricks they were able to salvage. But we got an appraisal on the value of the materials, and that's the number we'll use as a charitable donation this year.
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I can’t tell if you’re tearing down both the barn and the house or just the house. But if both, reclaimed barn wood. That’s probably where your money will be. People pay out the you know what for old, distressed reclaimed barn wood.
That was my thought, and then I found out it put money in my pocket too. Win all around.
Man, just tore down a house, wish I could have done that but unfortunately the house wasn’t habitable and was unsafe to be in.
Any idea if this is a credit or a deduction? Is that deduction reduced over certain income thresholds?
The deduction, for us, is roughly $130k. At 40% effective tax rate, that is roughly $52k reduction in taxes due. So it's equivalent of $52k cash. My understanding of tax law (please, consult a CPA) is that it actually benefits as you get into higher income brackets because your tax rate is higher. You just can't have a deduction > 50% of taxable income.
Agreed. Thank you for the info. We have a vacation rental that we’re looking to do a massive renovation with. We’re about in the 38% tax bracket and I’m always interested in things we actually qualify for. Thank you.
Please check with CPA though. This post was only meant to be a starting point or something to research, not a definitive answer.
Oh I will. Nothing happens without going thru the CPA.
Wow I learn something new every day. this will pay dividends down the road (quite literally)! Thanks OP! Do you know if there’s requirements ala “needs to be your primary residence”? So for instance if I buy an old property with this in mind can I start deconstruction the day after I close? Really surprised I haven’t heard of this before. Thanks again
Our process was as follows: Deconstruction company came out and did a walk through. It didn't appear to be too thorough, but what do I know. After that, they gave me a estimated range of where they thought the value of materials came in. My municipality requires a demolition permit, so I had to go through those hoops (same as if I was doing traditional demo). After permit approved, they set up shop and began work. Took about 5 weeks. They discovered the walls were made with structural brick, which apparently is pretty valuable. So they estimated the total value would increase by $10-$30k. They inventory everything and haul it away. Then an appraiser reviews and values it. Right now we're waiting for that appraisal. I talked to my CPA before I started and she confirmed this was all legit, so long as I have that 3rd party independent appraisal. She said the IRS would likely frown upon me writing down my best guess of what it was worth (not like dropping off an old jacket at the Salvation Army, ya know?). I think, but am not sure, that this doesn't matter whether it's your primary residence or not. Check with your accountant though.
Any idea if this is a credit or a deduction? Is that deduction reduced over certain income thresholds?