Real Estate Tax News and Updates – 2Q 2015
Election under TPR’s May Save Adjusted Tax Basis from Demolition
Under Code Section 280B, when a building is demolished the adjusted basis of the building (and the cost of demolition) less any salvage value must be capitalized and added to the basis of the land. This bright line rule was designed to eliminate any arguments (and tax litigation) by taxpayers claiming their original intent was to operate the building and the later decision to demolish the building should result in a loss deduction.
However, under the recently issued tangible property regulations (the “TPR”), a taxpayer that anticipates demolishing a building may place the building into a single asset general asset account (GAA) and continue to depreciate the building even after the building is demolished, instead of rolling over the remaining adjusted basis of the building into the land as otherwise required by Code Section 280B. See Treasury Regulation § 1.168(i)- 1(e)(3)(ii)(A). According to the TPR, a taxpayer is not required to terminate the GAA upon demolition of the building.
Because the period for filing late accounting method changes under the TPR has closed, the election to place a building into a GAA is only available for current and future years in which a property is acquired. For example, a taxpayer that acquired a property in 2011 and is about to begin demolition would not be entitled to make an election to place that property into a GAA and continue depreciation. Further, the election to place a building into a GAA is not available for buildings that are acquired and disposed of within the same year. See Treasury Regulation § 1.168(i)-1(c)(1)(i).
This new rule allowing for the continued depreciation of a demolished building would benefit taxpayers in the current marketplace. Given current real estate valuations, commercial real estate owners may begin to look for opportunities to acquire “tired” buildings that are in prime locations and demolish the existing structure and rebuild. Placing the old building in a GAA would allow the taxpayer to continue to depreciate the old building after demolition instead of rolling the building’s adjusted tax basis into land only to realize a tax benefit from the increased basis in the land upon disposition. The TPR essentially allow a taxpayer to deduct two buildings (the demolished building now in the GAA and the new structure).