Discussion:Rental Property - Tear Down Expense
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> Rental Property - Tear Down Expense
| 22 March 2006 | |
| Residential Rental - was a garage in the back that Owner decided it was more of a liability than it was worth so he had it torn down at a cost of $2,500.
Repair or mainternance expense? Something that has to be depreciated? | |
| 22 March 2006 | |
| If it was already falling down and in disrepair, I think you could make a case that it was for an existing condition, which then qualifies for repair write off. Otherwise...it would be a land improvement of some sort.
Hmmm. Consider making it into a pond? Oh, never mind, no write-off's for that apparently. *smiling* | |
| 23 March 2006 | |
| It becomes part of the basis. No depreciation. will recognize the expense when he sells, as part of the basis | |
| 23 March 2006 | |
| It was falling down and in disrepair which is why the owner had it removed.
So that $2,500 all becomes part of non-depreciable land? None attributable to the 27.5 year improvements on the land? [At least if it was made into a pond we might call it landscaping and depreciate it over 15 years.] | |
| 23 March 2006 | |
| I disagree. The recent cases are all about how to separate capitalization from repairs, and IRS is losing every time that something to take care of an existing condition is expensed. The biggest recent that I can recall was FedEx or Southwest Airlines or someone who was replacing Pratt and Whitney jet engines as part of on-going maintenance. IRS said, no, this is too much money. The court ruled, as all courts have of late, the amount does NOT matter, and that this was maintenance and not an improvement. If your roof leaks, and you replace it, it's repair, according to the courts. IRS disagrees.
For 2500 bucks, c'mon, and it was falling down? Repairs, you bet. | |
| 23 March 2006 | |
| The question of repair vs. capital expenditure is irrelevant. Demolition costs are nondeductible and must be added to the cost of the land upon which the garage is situated. See Sec. 280B. | |
| 23 March 2006 | |
| While the demolition costs must be added to the bisis, what would you do in the case where the cost of the garage (or other improvement) was not fully depreciated? What happens to the remainder of the cost basis? | |
| 24 March 2006 | |
| The undepreciated cost of the garage must also be added to the basis of the land. See Sec. 280B(1)(B). | |
| 25 March 2006 | |
| Riley2: What's your reference source on that? I was told that the undepreciated basis can be written off as a sale for $0 on 4797 ... what's my source? My son who works for the IRS. What do you think? | |
| 25 March 2006 | |
| Treasury Regulations, Subchapter A, Sec. 1.280B-1 | |
| 25 March 2006 | |
| Dennis ... The referenced section 1.280B-1 refers to the cost of the demolition, not the depreciated basis ... I think????? | |
| 25 March 2006 | |
| Sec._280B. Demolition of structures "any loss sustained" has to include loss of basis. And in most cases demolition increases value. | |
| 25 March 2006 | |
| "Any amount spent to demolish any structure, and any loss sustained on account of the demolition, must be added to the basis of the land on which the demolished structure was located." Code Sec. 280B(1), Code Sec. 280B(2). RIA Tax Desk ¶212,519 | |
| 30 March 2006 | |
| Pjnbar, sorry to disagree with an employee of the IRS. However, Congress disagrees with your son. Give your son a link to IRC Sec. 280B. | |
| 28 September 2006 | |
| What if there were insurance proceeds and the tear down resulted in a capital gain.(Insurance proceeds were in excess of the adjusted cost basis)The demolition cost will not be used in the cost basis but added to the basis in the land. | |
| 13 February 2014 | |
| You have to love Pjnbarb's arrogance 7 posts up, calling out Riley. He obviously did not know who he was dealing with. And then Riley's response (2 posts up). I miss him. | |
| 13 February 2014 | |
| Client incurred substantial environmental remediation costs. Part of those costs included the removal of a well. The well existed on the property when the company purchased the property, so the removal of the well went beyond restoring the property to its original condition when it was purchased.
The client is having a hard time believing that the cost of removing the well is not depreciable. I explained that he doesn't have an asset to depreciate. The basis in his land is increased. That said, it is interesting that the final regs limit the definition of "structure" for 280B to buildings. A well is not a building. Still, this seems like a slamdunk to me. I am posting just in case there is some angle that I might be missing. Any thoughts? Thanks, | |
| 13 February 2014 | |
| If the remediation occurred before 2012, you are golden (Sec 198). If not, I think your slam dunk conclusion is right. "Building" for this purpose (280B) is defined in the 1.48-1 regs. and includes structural components, which are in turn defined in part by the 1.48-1 regs., which include this: "The term “structural components” includes such parts of a building as walls, partitions, floors, and ceilings, as well as any permanent coverings therefor such as paneling or tiling; windows and doors; all components (whether in, on, or adjacent to the building) of a central air conditioning or heating system, including motors, compressors, pipes and ducts; plumbing and plumbing fixtures, such as sinks and bathtubs; electric wiring and lighting fixtures; chimneys; stairs, escalators, and elevators, including all components thereof; sprinkler systems; fire escapes; and other components relating to the operation or maintenance of a building." | |
| 14 February 2014 | |
| It occurred in 2012. It was very inconsiderate of Congress to not extend 198. 280B does not apply - it's a well in the ground (you probably read "wall"), so not a building or components of a building.
If you were a farmer, and you had land that you used to farm and weren't farming that land any more, and you ripped out the irrigation system, would you expense that cost or add it to the basis of the land? Under general tax principles, I believe you would add it to the basis of the land. Under the general rules for deducting environmental remediation under section 162, costs incurred to return the property to its original state are deductible. This general rule applies to costs such as containing the contaminated soil. The well was on the property when the company purchased the property. It's hard to argue that the cost of removing the well returned the property to its original state. Thanks for your response. | |
| 14 February 2014 | |
| No, I read "well". Why isn't it a component that relates to the operation of the building? Was it not the water source for the building? | |
| 14 February 2014 | |
| Ok, good point. I will have to find out what the well was used for. I didn't realize that I was making assumptions, but I was. Buildings are hooked up to city water supplies, so wells are used for ????
Thanks for the very good point. | |
Coddington (talk|edits) said: | 14 February 2014 |
| It may not be. Wells are sometimes used solely for landscaping. | |
| 14 February 2014 | |
| Right, but it's a good point that it's an important fact to find out. | |
Coddington (talk|edits) said: | 14 February 2014 |
| If the well is a structural component of the building, then its demolition may fall under the safe harbor of Rev. Proc. 95-27, which kicks it back into the normal rules of the proposed tangible dispostion regs. | |
| 14 February 2014 | |
| Nice cite. In fact, the well was not part of the building or used in its operation. I'm going to pursue whether the property was restored or improved. I've had a night to sleep on it, and now it is less daunting. | |
| 15 February 2014 | |
| Len, it took me this long to realize...the tone of your post sounded familiar, but I couldn't place you. Why did you change your user name? | |
Death&Taxes (talk|edits) said: | 15 February 2014 |
| 'the tone of your post sounded familiar'
So we have styles: EADave and his commas, Spell Czech and his correctness, and many more.......anyone want to categorize them by name? | |
