Property owners planning either a renovation or a rebuild of an existing facility have several tax implications to consider. The tax code clearly indicates that demolition expenditures are not deductible. In addition, the basis of a demolished building may not be written off and must be absorbed into the capitalized cost of the land beneath it. Strategic tax planning in conjunction with an IRS-approved cost-segregation study can create tax deductions for what would have otherwise been nondeductible renovation expenses.
The tax law allows for deductions on renovations where 75 percent of the external walls are retained, and 75 percent of the existing internal structural framework is retained. If more than 25 percent of these items are replaced, the entire basis of all structural components of the building must be capitalized as well as the costs of demolition. Any personal property, however, can be written off 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.
Cost-segregation study helps with deductions