I have the following case, numbers are made up, but the situation is real.
I purchased a house in 2021, rented it out, in 2022 I demoed it and build new, finished construction in January 2023 and rented out almost immediately.
In 2021 the structure costed 100000
In 2023 new build structure costed 200000, i.e. I spent that to build it.
Do I depreciate now on 200000 plus 100000, or since the first house was demolished I can't depreciate it?
Check out Sec 280B to ensure your facts and circumstances apply here. This is out of an article that should help you get your research started:
A taxpayer may not deduct losses sustained in the demolition of buildings and their structural components. Any amount expended or loss sustained by an owner or lessee on account of the demolition of any structure must be capitalized as part of the basis of the land on which the structure was located. The IRS has provided a safe harbor for certain structural modifications to a building that are not treated as a demolition and thus, not properly chargeable to the capital account with respect to the land on which the building is located. The safe harbor applies to the modification of a building that is not a historic structure if 75 percent or more of the existing external walls are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework is retained in place. While demolition costs are nondeductible, a taxpayer may claim a loss deduction when the depreciable business property is retired from use in a trade or business or from use in the production of income.
I would strongly advice talking with a real estate focused accountant here to help guide you. Best of luck here!
Check out Sec 280B to ensure your facts and circumstances apply here. This is out of an article that should help you get your research started:
A taxpayer may not deduct losses sustained in the demolition of buildings and their structural components. Any amount expended or loss sustained by an owner or lessee on account of the demolition of any structure must be capitalized as part of the basis of the land on which the structure was located. The IRS has provided a safe harbor for certain structural modifications to a building that are not treated as a demolition and thus, not properly chargeable to the capital account with respect to the land on which the building is located. The safe harbor applies to the modification of a building that is not a historic structure if 75 percent or more of the existing external walls are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework is retained in place. While demolition costs are nondeductible, a taxpayer may claim a loss deduction when the depreciable business property is retired from use in a trade or business or from use in the production of income.
I would strongly advice talking with a real estate focused accountant here to help guide you. Best of luck here!
When you demolish the original structure and build a new one, you typically cannot continue to depreciate the cost of the original structure. Instead, you start depreciating the cost of the new construction.
In your case, you would start depreciating the $200,000 cost of the new structure that was completed in January 2023. The $100,000 cost of the original structure in 2021 would not be depreciated further because it was demolished.
So, for tax purposes, you would only depreciate the cost associated with the new construction, not the original structure that was demolished.
The $100,000 plus the demo costs will be capitalized into land value. it cannot be depreciated, but you will eventually recover it when the new property is sold.
I have a loss (depriciation minus rents) on the original structure. Can I carry over this and apply to the income of the new construction after its rented out?