Capitalizing demolition costs for tenant improvements

[Anonymous]

Hi everyone,

I have a question regarding demolition costs for tenant improvements. Now this specifically is a new tenant improvement to replace an old one. It was a floor on a suite that was demolished. I had initially thought that you would capitalize the costs to the new tenant improvement. But then I read this revenue ruling: https://www.irs.gov/pub/irs-drop/rr-00-07.pdf .

It says that costs to remove telephones were deductible because it was related to the old asset. It also cited 280B but contrasted it by saying a whole building was to be added to the basis of the land. So my thinking is that I can go ahead and deduct those costs. I wanted to do a quick sanity check though to confirm if people agree.

Thanks in advance.

[BobKamman]

I couldn't read that Revenue Ruling without asking myself, "How many Poles does it take to deduct a new telephone pole?"  But what I got out of it was this:  

"If the retirement and removal of a depreciable asset occurs in connection with the installation or  production of a replacement asset, the costs incurred in removing the retired asset are not required to be capitalized under § 263(a) or 263A as part of the cost of the replacement asset."

But I still don't have a clear picture of what happened with your taxpayers.  Were they the ones who installed the original tenant improvements?  If so, have they been depreciating them?  Is there basis left?  And no, I'm not sure this matters.  

And of course, that Revenue Ruling is from 2000, and some of the rules on tenant improvements have changed since then, haven't they?  Do Sections 263 and 263A still apply?

[Anonymous]

HI Bob,

Thanks for the reply. So the taxpayer owns a commercial building. A new tenant just leased a floor. So the taxpayer demolished the old tenant improvement's floor. Yes, they were the ones who originally installed the tenant improvement. Yes, they have been depreciating it and there was some basis left. 

Yes, some of the rules have changed. I don't believe that 263A applies however because the demolition costs are related to the old asset. 

[BobKamman]

So these aren't tenant improvements, they are owner improvements.  No different from ripping off the old asphalt-shingle roof that was installed 10 years ago and is still being depreciated, and replacing it with a new tile roof.  I always have to look that one up.  

[Anonymous]

Yeah, so just to confirm you agree this should be deductible? 

[qbteachmt · Accepted solution]

For this owner, you have a cost of disposal, not a cost of improvement. You won't begin the improvement until the old assets are removed = taken out of service.

[BobKamman]

No, but I don't disagree either.  It's like asking what's the sound of one hand clapping.  Were there two different contracts, maybe with two different companies, for removal and then installation?  Even then, where did one job end and the other begin?

I try to stay away from commercial-building depreciation questions.  A few months ago my new landlord said they would be sending around someone to inspect my office for purposes of figuring component depreciation (they recently bought the place because it's in an OZ).  They could have asked me to count the doors and measure the carpeting, but maybe that doesn't cut the mustard with IRS.  Anyway, they never showed up.  Maybe they figured their losses are big enough already.  Maybe your taxpayer's losses are big enough already -- are you sure you want to deduct those costs, just to have more depreciation to recapture later?

In any case, these aren't telephone poles, so don't count on that analogy.