Wall Street Journal:  The Demolition Discount:

Scott and Pamela Weiss paid a little under $5 million for a home in Palo Alto, Calif., last year. Come tax time, they expect to get back about $66,000 for tearing it down.

That’s because the Weisses, who are spending more than $4 million to
build a new home on the site, took down the original home using a method
known as “deconstruction.” In this process, a crew carefully dismantles
an older property by hand instead of using bulldozers. The process
costs more than a straightforward demolition—the Weisses paid more than
$20,000 for the disassembly, roughly double what they would have paid
for a wrecking crew. But they were able to donate home materials such as
lumber, roof tiles and even lamps to nonprofits for reuse.

The donated materials were appraised by an appraisal-and-consulting firm at $159,000, which the Weisses can apply to their tax bill to receive a deduction. Based on the Weisses’ tax bracket, Ms. Weiss estimates that will ultimately work out to a savings of around $66,000, or more than three times the cost of the deconstruction.  …

Deconstruction is a growing trend, as more homeowners try to avoid
the wrecking ball when they remodel or tear down and instead find a way
to reuse everything from doors to windows to light switches. Spurring
the movement is growing awareness of “green” building, as well as more
laws restricting the dumping of building materials into landfills. It
doesn’t hurt that there’s typically a big fat tax break attached,
either.

While the tax break has been around for
decades, deconstruction had mostly occurred in fits and starts in
pockets across the country, including a wave in the 1990s. This current
surge is centered in wealthy enclaves along the West Coast, in areas
such as Silicon Valley and cities including San Diego, Los Angeles,
Portland, Ore., and Seattle. Many of those locales share a distinctive
set of features: populations with eco-friendly mind-sets; an older
housing stock ripe for tear downs; strict environmental laws and moneyed
residents eager for a substantial tax credit. …

The ReUse People of America, a nonprofit building-materials salvage and
reuse organization with 13 offices nationwide, says it has done 250
deconstructions this year, up 25% from 2008. The largest slice of the
deconstructions—about a fifth—took place in California, says ReUse
People’s president, Ted Reiff. Outside the West Coast, cities such as
Chicago and Durham, N.C., also had a sprinkling of deconstructions, he
says.

For the tax consequences of the alternative strategy of claiming a charitable deduction for the donation of a home to a fire department for demolition as a training exercise, see:

• IRS Burns Kirk Herbstreit’s Donation of Home to Fire Department (July 24, 2009)
• IRS Denies Deduction for Homes Donated to Fire Departments and Burned Down (Sept. 26, 2009)
• District Court Denies Charitable Deduction for Donation of Home to Fire Department (July 26, 2010)
• Oregon Gubernatorial Race Roiled by Candidate’s Charitable Deduction for Donation of Home to Fire Department (Oct. 7, 2010)
• Tax Court Denies Charitable Deduction for Home Demolished by Fire Department in Training Exercise (Nov. 5, 2010)
• Charitable Deductions for Homes Demolished by Fire Department in Training Exercises (Dec. 11, 2011)
• 7th Circuit Denies Charitable Deduction for Home Demolished by Fire Department in Training Exercise (Feb. 9, 2012)
• Tax Court Denies Charitable Deduction for Home Donated to Fire Department and Burned Down in Training Exercise (June 28, 2012)