Demolition Deductions

Written by Steven D. Beaucaire, MST
Vice President, Tax - Bedford Capital Consulting

Hold that wrecking ball! Whether you are planning to demolish or renovate a building, you do not want to make a move until you have examined the current tax code - as it may impact your strategy. While it is well known that demolition expenditures are not deductible, a cost segregation study can identify and then often allow property owners to write off many of the assets to be disposed.

Under the old law, property owners were worried about proving that the "intent" was not to demolish so that deductions would be available under remodeling guidelines. "Intent" was too ambiguous for the IRS, so the law changed in 1984.

The current code (§280B) does not allow the owner to deduct either the expenses for the demolition of a building or any loss sustained due to the demolition. If one is weighing the option to renovate rather than demolish a building, remodeling will not be considered demolition if:

1. 75% of the external walls are retained; and
2. 75% of the existing internal structural framework of the building is retained.

If you meet both of these requirements, then all expenses are deductible as a renovation.

All hope of a deduction is not lost if demolishing the structure is the only way to go. Regulation §1.48-1 defines the structure as a building and its structural components. However, the tangible personal property within the structure (or a part of it) can be written off when the building is demolished, provided; (1) the personal property is to be abandoned, (2) it was not purchased with the intent of disposition, and (3) it is identified and valued prior to demolition. Determining the value of personal property through a cost segregation study is the only acceptable way to satisfy the IRS.

Before crow bar and wrecking ball arrive, have the study done to protect yourself from losing valuable deductions. Whether you choose to go the rehab route or the demolition route, the one irrefutable fact is that it is too late to realize any tax benefits when you are looking at a pile of rubble.