Property teardowns and renovations are often incredibly lucrative for real estate developers, but while many opt to simply demolish the existing structure to get the project rolling as quickly as possible, taking a more careful, strategic approach can be much more cost-effective and allow for significant tax advantages.
More specifically, as the world looks to make the construction industry more sustainable and less harmful to the environment, one of the most accessible and increasingly popular strategies is to dramatically increase the reuse of materials from renovated structures. To achieve this, many government institutions and not-for-profit organizations have begun offering sizable tax incentives to those who opt for deconstruction as opposed to demolition.
In this article, we’ll take a closer look at both the environmental and tax advantages associated with property deconstruction in the U.S., as well as provide guidance around the material appraisal and certification processes for property developers.
A COST-EFFECTIVE OPTION TO COMBAT ENVIRONMENTAL WASTE
At this point, it’s well known that the construction, renovation, and tear-down of commercial and residential properties has become one of the biggest contributors to the release of harmful emissions and pollution of toxic materials into the environment. In fact, the global construction industry is now responsible for more than 2 billion tons of environmental waste each year, nearly double the amount being produced in 2018.
This would be alarming enough without any conceivable remedy, but it’s especially disconcerting when you consider that many of the demolished materials causing damage to our ecosystems can easily be preserved and reused toward the construction of new buildings. To be exact, if buildings are properly deconstructed for this purpose, roughly 90 percent of collected structural components can be reclaimed and donated for reuse.
This includes everything from brick, stone and plumbing materials to recycled lumber, the latter of which constitutes a rapidly burgeoning market expected to approach a valuation of nearly $100 billion by 2033.
Importantly, the growing demand for recycled building materials is about more than sustainability and the environment; it’s also a potential solution for combatting higher labor and materials costs that continue to persist due to pandemic-era inflation, as well as the uncertain international trade landscape arising from several ongoing geopolitical conflicts. In other words, prioritizing deconstruction over demolition to promote the reuse of materials provides tangible benefits for both the environment and the broader construction industry.
Of course, within the construction sector, this opportunity has become particularly attractive for developers, who are increasingly leveraging deconstruction to not only recoup their investment in commercial real estate, but sometimes even turn an immediate profit through the donation of preserved materials and utilization of corresponding tax deductions.
POST-DECONSTRUCTION: CHOOSING A NOT-FOR-PROFIT, APPRAISAL AND CERTIFICATION PROCESS
Deconstructing a property, particularly a large commercial structure, is inherently complex even in the absence of tax advantages, which is why it’s crucial for developers to work closely with their financial advisors to understand each step of the donation, appraisal and documentation processes to maximize all potential benefits.
Although specific requirements will virtually always vary depending on the individual project, at the very least developers should be prepared to navigate the following three-step process:
1. Taking inventory
Before deconstruction can begin, developers must choose which not-for-profit organization(s) they will partner with to receive donation of materials. Then, developers must enlist an inspector to compile a detailed inventory of the property, including all reusable materials from structural hardware to decorative fixtures and furniture, as well as plan for deconstruction that accounts for the cost of disassembly, the value of individual items and details regarding the not-for-profit organization(s) recipients.
Obtaining an accurate and comprehensive appraisal at this stage is paramount, and it will require extreme attention to detail to determine exactly which materials can be salvaged following deconstruction, as well as whether the tax advantages will be enough to offset the cost of the acquired property and any planned renovations.
2. Obtaining a receipt for donations.
After the property has been deconstructed and all reusable materials donated, the developer must obtain a receipt from the not-for-profit detailing all items that have been accepted for donation, reconciling this list with the original appraisal to determine the final value and make an informed estimation of tax deductions. Again, in many, if not most cases, this list of tax-deductible materials will be incredibly nuanced and complex, making it crucial to check (and re-check) that all items are accounted for, and calculations have been made as accurately as possible.
3. Submitting appraisal form for certification.
Finally, the appraisal following deconstruction and donation must be submitted to the U.S. government via IRS Form 8283, which is required to obtain deductions on all non-cash charitable contributions exceeding $500. To maximize benefits and avoid potential penalties, developers should work closely with their accounting and/or tax advisory teams to ensure the final report is accurate and filled out correctly prior to submission.
WINDHAM BRANNON CAN HELP
Critically, the above provides only a brief overview of how to navigate the wide and complex range of tax incentives that may correspond to the deconstruction process, underscoring the need for developers to work closely with their trusted tax professionals before deciding on the efficacy of this approach. If you’re considering investing in a tear-down or renovation project, reach out to your Windham Brannon advisor today, or contact Micah Greenberger, to learn more about all possible options and to conceive of the most effective strategy for meeting your goals.
