Discussion:Demolition costs
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Discussion Forum Index --> Advanced Tax Questions --> Demolition costs
Discussion Forum Index --> Tax Questions --> Demolition costs
Actionbsns (talk|edits) said: | 28 June 2008 |
| My client is leasing restaurant space and prior to opening their restaurant they had to extensively remodel. First step was tearing down and or removing a lot of things, then replacing things like plumbing, wiring, walls, etc. I'm pretty clear on how to treat the new items that have replaced the old, but what happens to demolition costs? Are they depreciated as qualified restaurant property over 15 years and would they just be called Leasehold Improvements? | |
| 28 June 2008 | |
| Action, I think I remember discussions on demolition, though I don't remember if they dealt with restuarants specifically. Have you done a search yet at the yellow box? May be something out there. | |
Actionbsns (talk|edits) said: | 28 June 2008 |
| I did do a search, Crow, very little popped up, but what did come up was relative to a private residence and what happens when the owner changes his/her property for rental purposes. This situation is the lessee extensively remodeling the lessor's building with the kicker of special rules for qualified restaurant property and the business isn't open at year end so it's not R&M. I am "Search Challenged" however, I was entering "Demolition Costs" and "Restaurant Demolition Costs", any better suggestions? | |
| 28 June 2008 | |
| The treatment of demolition costs depends on how much of the building was demolished. If a structure is demolished, the cost of the demolition is not deductible, nor can it be added to the depreciable basis of any replacement structure; it is capitalized into the cost of the land. IRC Sec. 280B.
Modification of a building is not treated as a demolition subject to these rules if at least 75% of the existing external walls remain in place as external or internal walls, and at least 75% of the internal structure of the building remains in place. Rev. Proc. 95-27, 1995-1 CB 704. If Sec. 280B is not applicable, then generally the demo costs would be capitalized as part of the depreciable cost of the improvements under IRC Sec. 263A (UNICAP). | |
| 28 June 2008 | |
| This is not meant to replace or be an alternative to Katie's answer, but I'm just including it as it's from the restaurant cost segregation guide. http://www.irs.gov/businesses/article/0,,id=134686,00.html
Clearing, grading, excavating and removal costs directly associated with the construction of sidewalks, parking areas, roadways and other depreciable land improvements are part of the cost of construction of the improvements. 1250 Property 00.3 Land Improvements – 15 Years Katie directly addresses demolition, whereas this is likely not applicable as it mentions site prep work. Did the 15 year continue for leasehold improvements past 1-1-2008, or would this be 39 years? | |
| 28 June 2008 | |
| Also, my answer above addressed demolition of property owned by the taxpayer, whereas this case involves leasehold improvements. I think the answer is that the costs would be added to the lessee's cost of the leasehold improvements and depreciated under whatever rules apply. It does look to me as though the 15-year period for leasehold improvements and qualified restaurant property is gone for property placed in service after 1/1/08, and the default seems to be 39 years. See IRC Sec. 168(e)(3)(E)(iv) and (v). | |
Donniecastleman (talk|edits) said: | 28 June 2008 |
| According to all of my accounting textbooks, demolition costs are capitalized and added to the basis of the new asset, but then, it's only a textbook. | |
Donniecastleman (talk|edits) said: | 28 June 2008 |
| Man, Katie's answer about the demolition costs being nondeductible and going into the cost of the land would really suck if it was a huge amount of section 8 housing to be torn down or a huge casino that had to be imploded with thousands of dollars in demolition crews, is there any exception to be noted? | |
Death&Taxes (talk|edits) said: | 28 June 2008 |
| Your fight is with the Code, Donnie, Sec. 280B; Katie is right and that is why she asks the extent of the demolition. 280B went into the Code effective 1/1/84. | |
RoyDaleOne (talk|edits) said: | 28 June 2008 |
| I don't think as Katie pointed out that 280B applies to leaseholds. The client apparently does not own the land or the building. | |
| 28 June 2008 | |
| But 280(b)(1) specifically mentions lessees. So to me, the statute serves as a particular warning to a lessee who agrees to pick up the cost of leasehold improvements: if you demolish more than 25% of the external walls etc.(i.e. more than the Rev. Proc. allows), you could be totally without any kind of tax "benefit" for those particular costs, because you have no land to capitalize the costs into.
So hopefully, Actions client will be able to fall within the beneficial allowances of the Rev. Proc. that Katie cited. | |
RoyDaleOne (talk|edits) said: | 28 June 2008 |
| (b) Definition of structure. For purposes of section 280B, the term structure means a building, as defined in §1.48–1(e)(1), including the structural components of that building, as defined in §1.48–1(e)(2). | |
| 28 June 2008 | |
| Oops, Crow is right, how did I miss that? Sec 280B denies any deduction for demolition costs to a lessee as well as to the owner of the property. So I agree with Crow, Actionbsns's client gets no tax benefit from these costs unless they fall within the Rev Proc. | |
RoyDaleOne (talk|edits) said: | 29 June 2008 |
| After carefully looking at the Sec. 280B, the language used is a "structure", the IRS by Regulation has expanded that term to include structure components as defined for the old investment tax credit. Now we all know the about cost segregation studies.
I suggest at a minimum the costs associated with the demolition of non-structure components could be capitalized into the new leasehold improvements. I also suggest that a proper evaluation of demolition costs is needed to determine, how much, if any, of the total demolition costs should be allocated to the new leaseholds. | |
Death&Taxes (talk|edits) said: | 29 June 2008 |
| I would hope that the lessee built these costs of remodeling into the negotiations for the lease amount, either as a concession to the rent to be paid at the onset or in some other way. | |
| 29 June 2008 | |
| Roy - Costs Associated with can not be - see "Costs Avoided" 280B and 268(a) (small a) "no deduction is allowed for the purchase of real estate, etc."
You are stuck with Capital Assets - the only way to accelerated depreciation is via an Engineering Based Cost Segregation Study - for this Restaurant you could get it for $5-7,000 - and don't overlook Sec 179D - Energy Tax Credits if the renovation so qualifies as "Energy Efficient Property". Good Luck | |
RoyDaleOne (talk|edits) said: | 30 June 2008 |
| You may want to check this proc.
REV. PROC. 95-27 | |
RoyDaleOne (talk|edits) said: | 30 June 2008 |
| http://www.irs.gov/businesses/article/0,,id=134686,00.html | |
Actionbsns (talk|edits) said: | 1 July 2008 |
| Thanks everyone!! I have some reading to do and assessing what has been discussed here. I've been without internet all weekend and this is the first chance I've had to read this. From conversations with the client and the pictures I've seen of the structure. The demolition seems to be limited to the interior part of the structure - walls torn down, plumbing and wiring ripped out and replaced, kitchen rebuilt, new bar, etc. I need to ask about the exterior walls, but I don't think they were touched unless it might have been to change windows. | |
Death&Taxes (talk|edits) said: | 1 July 2008 |
| "if at least 75% of the existing external walls remain in place as external or internal walls, and at least 75% of the internal structure of the building remains in place. Rev. Proc. 95-27"
The argument is balanced on that three letter word. | |
| 6 November 2009 | |
| I am a little "late" to the discussion here, but was doing some research. I agree with your findings, however, have does anyone thing Rev-Ruling 2000-7 can somewhat supercede this? I fail to see a difference in the example of Pole B in the ruling versus the wording in the Reg. Of course, reg wins over ruling right? | |
| 7 November 2009 | |
| I wonder if 2000-7 is limited to 263A issues and would apply to equipment, land impovements, and structures; BUT, then buildings are subject to 280B as well. | |
