Gone but not deductible

Nation's Business, June, 1997 by Gloria Gibba Marullo

It's expensive to build buildings--and to tear them down. When you're putting up a building, at least you can start immediately to deduct depreciation on both your financial statement (commonly called "book" depreciation) and your company's income-tax return. But tearing down an old building is another stow.

"If you demolish a building," says Michael Hollowell, director of client tax services with Price Waterhouse in South Bend, Ind., "you have two tax issues: What do you do with the costs of demolition? And how do you treat any remaining basis in the building?"

The basis of a building is generally the original cost plus any capital improvements minus the depreciation claimed over the years. For financial statements, any remaining "book" basis can be written off as a loss in the year the building is demolished. The tax rules, however, require that any remaining taxable basis be added to the value of the land. "You have to wait until the land is sold to get a tax benefit," says Hollowell.

When the land is sold, the remaining taxable value of the razed building increases the taxable cost of the land--which results in lower profit and a lower capital-gains tax.

The same holds true for the cost of demolition. For "book" purposes, demolition costs are deducted in the year the building is torn down. For tax purposes; the demolition costs must be added to the value of the land, thereby reducing your capitalgains tax when the land is sold.

The role delaying the tax benefit of demolition is especially frustrating for farofly businesses.

Fortunately, Hollowell has a solution to get a quicker tax break: Donate to your local fire department the building you'd like to demolish. "The fire department gets to practice putting out fires," says Hollowell, "and you get a charitable donation for the fair market value of the building."

Hollowell cautions, however, that this "hot" tip is not for everyone. "You need to consider the remaining tax basis in the building, the structure of the building, and the cost of more traditional methods of demolition. Then, if you decide the donation makes sense, you'll need the approval of the fire department and a formal appraisal of the buildings fair market value."

While there will probably be some cleanup costs after the fire that must be added to the cost of the land for tax purposes, the issues of how to get a current tax deduction for demolition costs will be dispatched quickly--and safely--by the fire department.

--Gloria Gibbs Marullo