Deconstruction or Demo?

14 Replies

I am in the process of subdividing a lot and building 2 new homes.  It was brought to my attention that deconstruction could more than pay for itself with the tax deduction.  But this is $30k more expensive than demoing.  If I model this with tax software as a donation it does more than pay for it, but my builder just told me that for a spec home that I immediately sell after construction, the deconstruction benefit only changes the basis on the sale and won't be as beneficial as a donation deduction.

I do plan to have a CPA do the taxes for this project next year, but don't have a CPA now and don't have the time to find one before the project starts.

So, deconstruct or demolish?

@Manolo D. , deconstruction for tax advantages is a first for me too... in these parts (around the greater DC area) older, smaller houses are being torn down with frequency to build newer, larger ones, and I've yet to dismantle one (nor have I seen any others do it).  If there's real meat on those bones, I'm curious why it's not happening around here. 

We've explored donating copper and other potentially valuable parts of houses to those who'll take it, but they won't perform the removal and the cost to extract these things and have them "curbside" didn't pan out.

@Brandon Hall , can you shed any light on this subject?

@Mark Caragio - while deconstruction may indeed be viable from a tax perspective, are there organizations (I presume they'd have to be an IRS compliant charitable organization) in your area who will receive the materials from you?  Do you have asbestos or lead paint to contend with?  As well, what materials do you have in mind that could be salvaged that would produce a net gain greater than $30K?

Originally posted by :

, deconstruction for tax advantages is a first for me too... in these parts (around the greater DC area) older, smaller houses are being torn down with frequency to build newer, larger ones, and I've yet to dismantle one (nor have I seen any others do it).  If there's real meat on those bones, I'm curious why it's not happening around here. 

We've explored donating copper and other potentially valuable parts of houses to those who'll take it, but they won't perform the removal and the cost to extract these things and have them "curbside" didn't pan out.

 Well, uhhm, smaller and older houses doesn't really help, they have a smaller foundation, meaning you have to have your structure built around it, or demo the whole thing, or have portions of it non-usable, in all cases, it is simply a tear down, I don't see how it is "de-construction", I still don't get the difference, by just mere words of it, it is a reverse of construction, which is demolition. Still, if you pull a demo permit/building permit, and your tonnage for the demo is substantial, then the city will normally point you to a C&D recycling company that you need to dump there to have 50% of your dump recycled, no surprise on that, I am just wondering if that is the case here, maybe there is some sort of IRS rebate that we don't know about, HA! RIGHT!?

@Brandon Hall Thanks for the clarifications.  Although this will be a spec build, so to speak (as I plan to sell both units after construction), I have owned this property for more than 20 years and have rented it the last 8 years.

I also plan to do a 1031 exchange with the proceeds, to purchase a like rental somewhere on the peninsula (and perhaps move into for retirement).

I do not do this for a living, and this is the only property I own besides my primary residence.

With the above in mind, will the donation be applied to my income taxes under Schedule A, or somehow applied to the basis of the replacement 1031 home?  We expect the amount of the donation to be about $130k

Thanks for the fire donation idea; I'll check that out further.

I do, btw, have a deconstruction company lined up for the job, and an estimate from an appraiser (for what he'll charge to appraise the amount of materials to be donated).

@Mark Caragio The donation will be recorded on schedule A and will not be a factor in the spec build.

You have an interesting though for two reasons.

(1) you have a capital asset (not ordinary income as I stated earlier) meaning you can write off the fair market value of the materials. How you plan to determine fair market value may cause a significance difference in the amount you write off. For instance, you estimate the donation is going to be $130k but is that factoring in your original cost basis or is that factoring in the fair market value of the property today? Make sure you understand the appraiser's methods. For instance, if you could sell the home today for $200k and the land is worth $30k, then the materials are arguably $170k less land improvements and foundational components. So just make sure you are getting the full value of your materials and that the calculations make sense.

(2) you want to do a 1031 but I'd be very cognizant of the fact that if you do not demonstrate investment intent, you are disbarred from 1031s. So the question is: how are you going to demonstrate investment intent on a spec build? Intent can change over time, so understand that if ever audited, the IRS may take the stance that you were not building with investment intent and rather meant to spec build as a business. Definitely have a good team of advisors surrounding you on this. You need a CPA, attorney, and 1031 specialist. We can likely demonstrate investment intent if we are proactive about it.

K...and my scenario will be more than intent.  It is demonstrable that it has been rented for the last 7.5 years, and we will rent out the replacement home.  Not sure how the IRS could interpret any other way (assuming we do indeed rent out the replacement home).

@Account Closed There you go, from the posts above, it is an IRS issue and not related into the development itself. I wouldn't know anything about donating and getting a good rebate on it. I am not sure if the 130k donated materials will come out as 130k rebate/donation in reality, but for sure, this will substantially increase demolition costs, easy 30k demolition instead of 5-15k, salvaging materials are never easy, but it is easy to drive a bobcat and run them around like there is no house there.

Brandon Hall I would think the value of the materials has nothing to do with the value of the house. You deconstruct the thing, and the value of the materials is whatever that non-profit can sell them for.

Meaning, the structure might have a retail value of $100k, but the deconstructed pile of stuff could easily and logically have a retail value of $20k.

What am I missing?

(May be moot if the OP has an appraiser who's willing to say whatever he says)

I absolutely agree with @Justin R. . A house is more than a pile of sticks, and bricks, and pipes.

Anyone trying to value the land by subtracting it from the appraisal of the house may also run into problems with the IRS. In my fire donation scenario I was warned that the IRS might reject my donation if I did not have an appraisal of the vacant land by itself. It was difficult (and a bit expensive) to find an appraiser who would do that appraisal because the house was in an area that did have many comps for vacant land. When I submitted my tax return for the year of the donation it included a full appraisal of just the land plus a full appraisal of the house and land together. We took the difference between the two appraisals as the value of the donation.

Deconstruction would also get you far along the path for LEED certification. You may want to build a premium on the value in your analysis due to LEED status, and explore what the requirements would be. You may find deconstruction as a starting point would get you 90 pct of the way to cert.