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Burning Down the House

Back in 1984, the band Talking Heads produced their Top 10 hit, “Burning Down the House.” But did you know that you might get a tax deduction for burning down your own house?

Imagine you’re looking to build your dream house. You’ve found the perfect lot in the perfect location. The only problem is, there’s already a house on the lot – an old house, not worth renovating, that you’d like to get rid of as fast as possible.

Sure, you can hire a contractor to come in and tear it down the old-fashioned way. But what if you’re looking for something more dramatic? And what if you want a way to demolish your tax bill along with the old house?

Many taxpayers have claimed fat deductions for donating the house (but not the land) to the local fire department, to burn down for practice. They claim the value of the house, as determined by the local auditor, as a charitable gift. They can deduct up to 50% of their “adjusted gross income” (AGI) the year they burn down the house. If the value of the house is more than 50% of their AGI, they can carry forward the rest of the gift up to 15 years.

Maybe they even get to invite the new neighbors to a marshmallow roast!

Of course, there are still some rules to follow.

Back in 2004, former Ohio State quarterback and ESPN commentator Kirk Herbstreit claimed a $330,000 deduction for donating his home to the Upper Arlington fire department. Firefighters used it to simulate search-and-rescue drills, while police officers used it to simulate hostage rescues and similar situations. Then the fire department burned it to the ground, and Herbstreit rebuilt on the lot.

This was hardly an uncommon arrangement. Since 1988, the city has burned 28 donated homes.

Recently, however, the IRS disallowed the deduction, arguing that Herbstreit hadn’t donated his “entire interest” in the home. Herbstriet paid the tax and took his case to Tax Court. This isn’t the first time the issue has reached the court. Back in 1973, the court ruled that a homeowner who donated a building to the local fire department “benefited only incidentally” from the demolition and was entitled to take the deduction. But in Herbstreit’s case, the court hasn’t ruled yet.

You’re probably not looking to claim tax benefits from burning down your house. But Herbstriet’s case shows just how valuable the right tax-planning strategy can be – even in some pretty unique circumstances! So be sure to call us before you make any major charitable gifts. We can help you make sure you get all the benefit you deserve.

Article by Randy Roth & Owen Arnoff at Incompass Tax

Randy Roth, EA, MSFS, CSA & Owen Arnoff, EA, ATP, Fellow NTPI


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