Deductibility of pre-demolition payments to tenants.

• Author: Leibtag, Bernard

Pre-Deficit Reduction Act of 1984 (DRA '84) Sec. 280B allowed for the immediate expensing of a structure's demolition costs (except for certain historic structures). After the DRA '84, any amount expended for demolition of a structure is nondeductible, under Sec. 280B(1)(a). Moreover, the costs incurred are capitalized to the land, under Sec. 280B(2); thus, the taxpayer receives a tax benefit for the demolition costs only if the land is sold. (There is no depreciation of such costs, for example, over the new building's life, even though, presumably, it will be built on the site of the old structure.)

Frequently, in demolishing a structure, there can be costs other than those of demolition itself; how are they treated? Neither Sec. 280B nor its regulations provide an answer.

Lease Termination Costs

When tenants occupy a building to be demolished, they may be paid a fee to vacate (lease termination fee). Rev. Rul. 71-283 addressed a situation in which a building owner had leased the property to a tenant. Three years into the five-year lease, the owner decided to use the building for his own purposes and, thus, paid the tenant a lease cancellation fee. The Service ruled that the fee was amortizable over the lease's unexpired term, under general Sec. 263 rules.

Although Rev. Rul. 71-283 does not deal with a demolition, its logic seems to apply. Thus, in a...