I think we need more than the basic facts.  Was the land worth more or less, once the house was torn down?  Let's say the basis of the land was 10K, and the building was 20K with 5K depreciation already claimed.  There were no demolition costs because the fire department used it for practice.  

If the land is still worth only $10K, what happens to the remaining $15K basis for improvements?  If they had burned down without the help of the fire department, wouldn't that be a deductible casualty loss?  Both abandonment and casualty loss come under Section 165.  

On the other hand, if the land is now worth $40K because it doesn't have an old house preventing development, it seems that the $25K basis should be carried over to the new primary residence.  Or should it be $30K with $5K depreciation recapture?  Why?