Building Demolition

Demolishing Your Building? You Need to Read This.  Now.

When investors and building owners purchase a building that may need to be totally gutted soon, they are disheartened to learn that they will lose all future depreciation deductions related to the building.

This Regulation is under §280B. §280B states that if a building is being demolished and more than 25 percent of the walls and stairwells are being knocked down and removed, the entire remaining depreciable basis of that building must go to land. Land cannot be depreciated, so the future depreciation of the demolished building is gone.

This is yet another reason you must choose a cost segregation firm with knowledge of the Tangible Property Regulations!

Sec. 280B states that “in the case of the demolition of any structure, any amount expended for such demolition, or any loss sustained on account of such demolition shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located.” 280B offers a safe harbor for situations where only parts of a building structure are demolished (Rev. Proc. 95-27). The safe harbor specifies that modifications will not be treated as a demolition under §280B if:

  1. 75% or more of the existing external walls of the building are retained in place as internal or external walls.
  2. 75% or more of the existing internal structural framework of the building remains in place.

As Tax Method Change professionals, TPTM understands this situation and can help. 

The Tangible Property Regulations offer an opportunity to continue depreciating a building after demolition has occurred. To use this strategy, a taxpayer must include the building in a General Asset Account (GAA) in the year the building is placed in service. The election must be made on an original tax return. So, tax professionals must recognize this opportunity the same year the building was put into service.

The basis associated with that asset remains in the GAA and continues to depreciate. (See §§ 1.168(i)-1(e)(2)(i) and (iii).) Furthermore, the basis of a demolished building subject to §280B is zero, but the taxpayer continues to depreciate the basis in the GAA.

The election is made on Form 4562 and by including a statement in the taxpayer’s records that identifies the assets included in each GAA.

All is not lost if the demolished building was not put into a GAA in the first year of occupancy. A Cost Segregation study can be done before demolition, and the 1245 property (including bonus) can be expensed. Still, the structural assets (1250 property) will not continue to be depreciated, and the basis will move into land.

Kevin Jerry is a nationally recognized expert in Tax Method Changes. He specializes in Cost Segregation, Tangible Property Regulations, and revenue recognition changes. Kevin graduated cum laude from the University of Cincinnati with a Master of Science Degree in Real Estate Taxation. Over the last seven years, he has worked with Eric Wallace on the Tangible Property Regulations with some of the largest property owners in the country.