Important Considerations Before Demolition or Renovation

[Julio Gonzalez]

When you are demoing or renovating a building where you tear out HVAC units, lighting, and other components, these assets are considered retired or abandoned from the building. Therefore, the book value of these assets qualifies as a business deduction. The tangible personal property in the building qualifies for the remaining basis or depreciable value to be written off when the asset is abandoned or retired, as long as the personal property was not purchased with the intention to demolish and is not in service. The asset and its book value must be determined before the demolition or renovation.

There’s an opportunity to take advantage of both the real estate asset disposition study and the Energy Tax Deductions when you re-light a building. A new energy-effecient lighting system eliminates excess lighting and it can typically be depreciated separate from the building which is depreciated over 39 years. This helps save money and maximize available tax strategies.

What Property Qualifies for Real Estate Asset Disposition?

There were changes to tax regulations recently that now allows for the disposition of individual building components. The IRS previously viewed a building as a single unit of property (UOP). The new regulations found in IRS Code 1.168(i)-8 allows a property owner to dispose of a smaller UOP provided that a detailed cost segregation report has properly broken down individualized UOP within the larger unit. The IRS now requires property owners to depreciate 9 separate units of property within their real property:

• Elevators
• Security
• HVAC Units
• Escalators
• Gas Distributions System
• Fire Alarm and Suppression
• Electrical System
• Structure of the building (including windows, roof, concrete and walls)
• Plumbing System

Is this a tax strategy you’ve utilized on past demolitions or renovations?