By Steven Singer, CPA, MS (tax)
If your home or rental property needs remodeling, consider getting a charitable tax contribution by helping a worthwhile cause. Many charities build and renovate homes for the needy. The tax law allows you to take a charitable deduction for donating used building materials removed from your house or rental property when they are used by a qualified organization.
How much you can deduct depends on the fair market value (FMV) of the materials you donate and when you donate them?
AMOUNT OF YOUR CHARITABLE DEDUCTION
• For property held for more than 1 year, you will usually get a deduction of the FMV of the materials donated. If the property was used for business or rental purposes, you must reduce the FMV by any gain (if you sold the property) that is considered ordinary income. This is a simple calculation if you ask your tax advisor.
• For property held less than 1 year, you will usually get a deduction of either the FMV or the cost basis (less any depreciation allowed) of the materials donated, whichever is less.
• There may be limits depending on how much you contribute and your adjusted gross income, but the good news is, you can carry forward any unused deduction to later years.
STEPS NEEDED TO GET A CHARITABLE DEDUCTION
Before you begin your remolding process:
1. Get your licensed contractor to give you two bid quotes. One for deconstructing the space that you are remodeling and another one for demolishing it. Deconstructing the space is more expensive than demolition because fixtures, sheetrock, wood studs and more are taken apart slowly and carefully by hand to recycle every last piece as opposed to demolition where they rip out the materials without any consideration for reusing them (e.g. they just go into the dump).
Deconstruction usually is 1.5 to 2 times more expensive than a demolition process. However, since demotion is only a small part of your remodel, it should not add a large cost to your overall remodel.
2. Find an appraiser that can appraise the reusable materials that result from the “deconstruction” process. Usually they can give you an idea of the FMV per sq. ft. of real property you are remodeling. Appraisal costs range but typically are around $2,000-10,000. They will need to see the materials before they are donated to a charity so they can issue an appraisal report.
3. Consult with your tax advisor. They usually know a qualified appraiser you can use in your area or one can be recommended by the charity to which, you are going to donate the materials.
Your tax advisor should also be able to determine whether it is cost beneficial to consider getting a charitable deduction. For example, if the appraisal cost is $5,000 and the additional contractor cost of deconstruction is $5,000, the donation you must receive must exceed $35,000 to give you a net tax benefit. Some of our clients have obtained charitable benefits of over $100,000.
4. Pick a 501(c)(3) US charity in your area that has as their mission to use the materials in their programs such as Habitat for Humanity.
After your remodeling process:
5. The appraiser will give you a signed appraisal report and an IRS form 8283 signed by both the appraiser and the charity to which, you contributed the material; both must be attached to your tax return.
If these steps are followed correctly, then there is an excellent chance that much of the costs of your next remodel can be claimed as a charitable contribution.
For more information about this and other tax strategies to help you pay only your fair share of taxes, please contact or call Steve at 510-797-8661 X 226 or email him at email@example.com.