It is increasingly common for wealthy people to buy an existing home in a desirable neighborhood and immediately tear it down and build a larger "McMansion" on the property.  But did you know that it may be possible to get a tax deduction for the value of the existing home by donating it to the local fire department to burn it down as part of a training exercise?  From yesterday's Columbus Dispatch:  Herbstreit 'Fire' Puts Focus on IRS Dispute; Tax Deduction Denied to Couples Who Gave Houses For Fire Drills, by Kathy Lynn Gray:

In March, the Buckeye-turned-ESPN commentator sued the IRS for rejecting a $330,000 tax deduction he and his wife, Allison, took for donating their house at 2321 Onandaga Dr. to the Upper Arlington Fire Division.

The donation — and the deduction — have been common for at least two decades for Upper Arlington residents who wanted to build new homes on property where old homes resided. Firefighters have used the old houses for training and burn-down exercises. Columbus lawyer Terry Grady said the IRS didn't challenge the deductions until 2004 — the year the Herbstreits donated their house. …

Although the number of people nationwide who donate homes to fire departments is small, the tax-deduction question isn't peculiar to central Ohio. Cases have cropped up in Wisconsin and Minnesota, and at least one other lawsuit is pending in federal court. An online discussionon the subject has lasted three years on http://www.taxalmanac.org as some accountants argue that the donation isn't eligible for a deduction and others say it is. …

In U.S. District Court records, the IRS argues that the two Upper Arlington couples did not donate their entire interests in the homes to the fire department and thus are not allowed to take the deduction. Grady said the IRS makes that argument because the couples donated only the structures, not the land. But Grady argues that the contributions were the entire interests of each home and thus are allowable under tax law. He said both couples used only the appraised values of the homes as their deduction and didn't include the value of the land. …

Since 1988, 31 houses and one commercial building have been donated and 28 have been burned, city records show.

For more on the deductibility of homes donated to a local fire department, see:

• Scharf v. Commissioner, T.C. Memo 1973-265:  "While we are confronted here with an exceedingly close question, we conclude under these particular circumstances that the benefit flowing back to petitioner, consisting of clearer land, was far less than the greater benefit flowing to the volunteer fire department's training and equipment testing operations. The Margolin building, even after razing, still was not completely cleared from the land. Petitioner needed to remove the debris, demolish the foundation and chimney and cover the land before he could market the property. We think the petitioner benefited only incidentally from the demolition of the building and that the community was primarily benefited in its fire control and prevention operations. Consequently, on balance, we hold that the petitioner is entitled to a charitable contribution deduction."
• ABA Tax Listserv
• Charitable Contribution Deductions – An Alternative to Capitalization of Demolition Costs
• Encyclopedia Britannica, Tax Aspects of Contributing a House to a Fire Department
• Forbes, Ultradeductible
• The Tax Adviser, Arson Is Not a Capital Offense

(Hat Tip: Ann Murphy.)