2.3.4.2. Deductions for Improvements, Demolitions, and Exchanges
Costs incurred after the asset has been purchased that increase the productivity or extend the life of that asset add to its initial tax basis and are depreciated according to the life of that asset. The cost of a new roof on a commercial building, for example, is an improvement that may be expected to extend the life of that building. These improvement costs will be added to the building’s tax basis and depreciated over 39 years, the depreciable life of the building.
When a building is demolished, neither the cost of demolition nor any loss for the undepreciated basis of the building is deductible. Instead, both must be added to the land value. Any loss from the undepreciated basis of the demolished structure or the demolition will only be recognized when the property is sold.
The recovery period of a replacement property involving a like-kind exchange depends on whether or not the replacement property has a longer or shorter remaining economic life than the relinquished property (for a discussion of like-kind exchanges. If the replacement property’s remaining recovery period is longer, the new owner will adopt the recovery period of the replacement property. If the replacement property’s remaining recovery period is shorter, the new owner will retain the recovery period of the relinquished property.
26 CFR 1.263(a)-3 and 26 CFR 1.165-3
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Deductions for Improvements, Demolitions, and Exchanges |
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