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Don't get burned trying to beat IRS

Letting the fire department burn down your old house to clear land for McMansion is usually deductible.

By Jeff Schnepper Feb 17, 2010 12:21PM

Before the real estate market cratered, it was fashionable to buy an old home on a huge lot, tear down the building and construct a new McMansion. Since this was a personal expense, the destruction of the old house was not deductible.


Then, some taxpayers got creative.


It seems that many fire departments need homes to practice their search-and-rescue procedures, sharpen their firefighting techniques and test their equipment. Give your old house to the fire department to torch and you’ve made a deductible charitable contribution. You’ve also cleared your land for your new McMansion.


Looks like a win-win situation for everybody except the IRS.

When our bureaucratic bandits tried to deny the deduction, they were slapped down by the courts. The donation of the building for a fire company’s training and equipment testing was clearly allowable.

The IRS tried smoke and mirrors, arguing that the taxpayer did not gift the entire property because he didn’t donate the land. But, the taxpayer only deducted the house, which was an asset unmistakably separate from the land itself.


Bottom line? A sweeping victory for the taxpayer.


But, the magic doesn’t always work. In another case, the court found the value of the property without the building was greater than the value with it and denied the deduction.


I think this was a bad decision. The fact that you also receive a benefit shouldn’t obviate the charitable contribution. Do I lose my deduction for a cash contribution to the Red Cross just because they rescue me from a flood next week?


I don’t think so!


So, my advice to my clients is simple – burn, baby, burn!


But remember to get a receipt.


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