Income Tax Consequences for Demolishing Farm Buildings

IRC Section 280B disallows deduction for the cost of demolishing buildings.  This cost, and the remaining building basis, is to be added to the lands’ basis, therefore would only be recovered upon a future sale of the land. Here are some examples:

First:  If a farm is purchased and the existing farmstead is to be demolished and buried, this cost is added to the lands’  basis and there is no current deduction.  If the buildings are used for a time, depreciation may be taken on the buildings.  In this case, at the time of demolition, the remaining basis on the building, yet to be depreciated, would also be added to the lands’ basis as would the cost of demolition.

Second:  What if the buildings are abandoned?  Then the remaining basis of the buildings is treated as a disposition or as a sale for zero dollars.  Therefore, the remaining basis becomes an ordinary loss and is reported on Form 4797.

Third:  What if abandoned buildings are later demolished, at least one year after these were no longer used in the farm business?  In this case, there is no remaining basis on the buildings and the only remaining addition to the basis of the land would be the cost of demolition.

The tax treatment for the cost of demolition, such as taking down trees and buildings, closing wells, and grading the site for future tillage, may only be deducted during the period of productive use of the buildings.  Since there is no productive state of the abandoned buildings, these costs are expenses for development and  are treated as a capital investment.  Therefore, these costs are added to the basis of the land.