Safe harbor for demolition expenditures.

• Author: Bowers, Jennifer J.
• Position: Brief Article

Prior to the Deficit Reduction Act of 1984 (DRA), demolition costs were required to be capitalized only if a building was acquired or leased with the intent to demolish the structure. Effective with the DRA, Sec. 280B denies a deduction for any costs or losses associated with the demolition of a structure; demolition expenditures must be treated as a capital item.

The IRS recently issued Rev. Proc. 95-27, which provides a safe harbor for structural modifications not to be treated as nondeductible demolition costs. Under the general safe harbor relief, structural modifications will not be deemed to be capital costs if (1) at least 75% of the existing external walls of the building are retained in place and (2) at least 75% of the existing internal structural framework is retained. A modification of certified historic structures is subject to the same safe...