October 18, 2010

Tax Deductible Usage of Real Property by the Fire Department

Related Service Tax & Business

Tax Deductible Usage of Real Property by the Fire Department Tax & Business

During 2004, a married couple (Hendrix) granted their local fire department permission to use their Ohio home for a training exercise. Once this old home was burned down and cleared, the Hendrix’s planned to build a new home on this land.

A donation of real property, such as land or a building, to a qualified organization is generally a tax deductible charitable contribution. However, according to the Internal Revenue Code, a taxpayer must obtain a “qualified appraisal” for any real property donated with a fair market value exceeding $5,000. The appraisal must be submitted along with the donor’s income tax return, by the due date of their return (including extensions).

A qualified appraisal must explicitly state that it was prepared for income tax purposes. In addition, the qualified appraisal must disclose the anticipated date of contribution and the competencies of the appraiser. The appraiser is required to have obtained either the education or job experience necessary to perform an appraisal in accordance with generally accepted appraisal standards (subject to the discretion of the Secretary of the Treasury). Solely providing the license number of the appraiser is insufficient. A qualified appraisal must also include any other significant terms of the real property usage (description of the property, restrictions on the property, rights to income generated by the property, any goods or services obtained by the donor, etc).

Since the appraisal submitted by the Hendrix’s did not meet any of these requirements, the $287,400 charitable contribution deduction that the Hendrix’s reflected on their 2004 tax return was disallowed and they were subsequently forced to pay an additional $100,590 in taxes.

Although the United States District Court never did issue an opinion on whether an occurrence of this nature is deductible as a charitable contribution, the Court ruled that the Hendrix’s did not obtain a qualified appraisal for the property (or use of the property) and a charitable deduction was denied on this basis.

Please consult with your Marcum tax advisor if you have any questions.