Burnin’ Down the House

By August 13, 2010 Individuals

Before you go burnin’ down the house for the tax write off, make sure you’re affairs are in order.
At least that’s what one couple may discover after their charitable deduction was denied for their $330,000 home that they donated to the local fire department.  ESPN commentator Kirk Herbstreit and his wife claimed the charitable deduction after allowing the Upper Arlington Fire Division to burn down their home for practice so that they could build a new one on the same site.  The IRS rejected the deduction and charged them with $134,606 in back taxes.  They have appealed to the tax court, but may face difficulties now that a similar case has been rejected.

James and Lori Hendrix, who tried the same tactic, now owe $125,053 in back taxes and penalties after donating their $287,400 home to the fire department and claiming the charitable deduction.  Why did the Court side with the IRS?  Surprisingly, not because their donation benefited them with cheap demolition.

Kiplinger reports that the Hendrix case was held up because of a bad appraisal.  The appraiser did not list the expected date of the donation or that the appraisal was for tax purposes. Also, appraiser’s credentials were called into question.  These errors on the part of the appraiser cost the Hendrix family $125,053.  The IRS requires the expected date of donation and indication that the appraisal is for tax purposes on any donation over $5,000.

Will the Herbstreit’s face the same uphill battle?  Yes if there is the slightest reason to toss their appeal.  The IRS has been looking to overturn the tax precedent on homes donated to be burned since they lost a similar case in 1973.  What is the moral of the story?  Make sure your i’s are dotted and t’s are crossed when you are taking on the IRS, preferably before you burn the house down.