Demolition

From TaxAlmanac

In the Fall of 1983 a client asked that if he pulled down his rental property on the Jersey shore that he had purchased in 1978, could he write off the remaining basis in the building. His reasoning was that the house needed constant shoring up with braces since it was built on sandy soil not more than 200 yards from the ocean. I determined in my mind that he had not bought the property to tear it down, that his reasoning passed muster, and that at that date, the remaining basis and demolition would be deductible.

There were no passive loss rules in that year, and in 1983 Sec. 280B pertained only to 'certain historic structures.' This property did not fit this definition. My client acted, obtained a permit from the town to do remodeling, and knowing he would have a demolition loss of over $100,000, took money out of his deferred compensation so that his income bracket would not be too low and waste other deductions.

Lucky client! 1984 saw Congress eliminate the phrasing 'Certain Historic Structures' from Sec. 280B, and the change was effective retroactive to 1/1/84. Perhaps this is the reason my client was audited. "Prove your demolition loss" IRS said. Besides the contractor's bill dated December 1983, I was able to produce a letter from the town's building inspector, who wrote complaining that Mr. Client had exceeded the authority granted him in the permit. The Inspector wrote, "I drove past the location on December 12, 1983 and found that the building no longer exists, having been leveled to the ground and the foundation dug up.' This was proof in spades. My lucky client probably deducted the last demolition loss allowed under the old code, but the question still arises, as these discussions evidence:

Discussion: Demolition of rental property

Discussion: Demolition of buildings (Treasury Reg. Sec. 1.165-3)