The release of final Treasury regulations on the disposition of MACRS property has increased interest in the current legal treatment of demolition costs. In general, taxpayers may now rely on the final regulations of Treasury Decision 9689when determining how to treat asset dispositions. Though these final regulations describe when an asset disposition occurs, the related final regulations on tangible property capitalization in Treasury Decision 9636 control how to treat the demolition costs.
Under those final regulations, when a taxpayer realizes gain or loss on the disposition of an asset, the taxpayer may expense the demolition and removal costs for that asset. When the taxpayer does not realize gain or loss on an asset disposition, the costs of demolishing or removing the asset are capitalized. The following chart summarizes how to treat demolition and removal costs under the final regulations.
Please note that the above chart is based on realization, not recognition. Exchanges and involuntary conversions are often non-recognition events for federal income tax purposes. Nonetheless, they are dispositions and realization events, which dictates the treatment of asset removal costs.
Under the final regulations, demolition and removal costs are only capitalized when gain or loss is not realized. Examples of this type of situation include a building demolition that is capitalized to a non-depreciable land account under §280B or when a component of an asset is replaced without a partial disposition election. This provides taxpayers some flexibility to lower current year expenses when making structural improvements by capitalizing removal costs.
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