July 13, 2012

Donate Your House to Charity

Sometimes in life you cannot have your cake and it too. 

The following case addressed a family's attempt to donate their home to a local fire department and the accompanying tax consequences.

Rolfs v Commissioner (7th Cir 2012) 668 F3d 888

The Rolfs purchased a lakefront property on Pine Lake in Chenequa, Wisconsin. The Rolfs were dissatisfied with the existing home and decided to donate the home to the local fire department for training. The fire department, not surprisingly, burned down the house in a subsequent exercise. The Rolfs then claimed a $76,000 charitable deduction on their 1998 tax return for the donated home. Their theory was as follows "[t]he taxpayers argued that the "before-and-after" method should be applied. Their appraiser started with an estimated value of $675,000 for the land and house together, based on comparisons to recent sales of similar properties in the area. Using the same method, he estimated a value of $599,000 for the land alone, without any house on it. He subtracted the latter from the former to estimate $76,000 as the value of the house alone." 

The IRS was dissuaded with this claim and rejected it. The Rolfs then lost on appeal to the Tax Court and appealed again to the circuit court of appeals.

The appellate court affirmed, finding that when donated property is subject to a condition, the condition needs to be accounted for when making the property valuation. In other words, if a donation has strings attached, you need to factor the strings into the valuation equation. In this case, a donated home, given on the condition of subsequent incineration, has practically no value. Trust me on this one.

Furthermore, the appellate court affirmed the finding that the Rolfs received a benefit of $10,000 by donating their home to the fire department. Since the old home would invariably be razed to make way for the new home, this donation essentially benefited the Rolfs aside from the charitable deduction because the fire department performed the necessary destruction of the home. Thus, if the Rolfs' deduction was upheld, the benefit to them would be twofold. First, they would receive a charitable deduction for their donated home. Second, they would avoid having to pay somebody to tear down their home. 

On the bright side, the donation saved the Rolfs the trouble of finding a company to apply a wrecking ball to their home. Hence the latter benefit remained intact despite the court's ruling, the home destruction by the fire department, while the former benefit, the charitable deduction, was disallowed.