Cost seg and then demo?

Question

We purchased some property for $350k with two old buildings on it. The county also recently assessed the value at $350k, split between $130k improvements and $220k land.

We had planned to demo the older structures (one is a small house, one is a large barn) in 2025 and then begin to develop the land in 2026. However, the demo permit continues to be delayed so we are now thinking of putting the buildings into service (as storage rental space) this year.

My understanding that this would allow us to do cost seg to get depreciation in 2025. Questions for the experts:

1. If we take bonus depreciation in 2025, can we still demo in 2026 with no issues?

2. can I do DIY cost seg given this is such a small property? If so, what is the best option for that?

Ashish Acharya · Answer

@Bryan Johns,

You’re on the right track. A couple clarifications that might help:

If you don’t do a cost seg and just put the buildings into service, then demo later, you can generally write off the remaining adjusted basis of the building as a demolition loss (since you didn’t buy it with the intent to tear it down - establish this).

If you do a cost seg and take depreciation (including bonus), your basis just gets reduced by what you already wrote off. When you demo, you still get a loss, but it’s smaller—because the bonus depreciation is already in your pocket. It’s not really “recapture” in this case, just a reduced loss.

On DIY cost seg: for something this size you probably don’t need a full-blown engineering study. A lot of people either use DIY software (like KBKG’s tool) or take a rule-of-thumb allocation and have their CPA review it. Just make sure you’ve got some backup (photos, estimates, etc.) so if the IRS asks, you can show how you came up with the numbers.

So yes, you can bonus in 2025 and still demo in 2026 with no problem—the tradeoff is whether you’d rather have a bigger upfront bonus depreciation now, or a bigger demolition loss later.

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This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

Bryan Johns · Answer

Thank you! So basically, if the LLC that owns the property spends $30k to demo the structure, this gets added to basis and the benefit is at some future point beyond 2025.

Josh L. · Answer

The issue with being proactive with demo is that you can’t write off demo unless you’re thinking ahead, as @Ashish Acharya mentioned. Demo costs will get capitalized to land, and you can’t depreciate land. Not to get technical, but just wanted to show the source at end. Defintely would require digging into facts and circumstances and looking at options and being well documented. Good question though. Thanks for sharing.

Section 280B In the case of the demolition of any structure—(1)no deduction otherwise allowable under this chapter shall be allowed to the owner or lessee of such structure for—(A)any amount expended for such demolition, or(B)any loss sustained on account of such demolition; and(2)amounts described in paragraph (1) shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located.

Bryan Johns · Answer

Thank you. I don't think I can establish that we had no intent to demo. The buildings have some flood damage so provide no usable value unless we do at least minor rehab to put it into service. The question was just do we demo in 2025 or a future year?

If we rehab and the storage use works out, we may keep buildings. If it doesn't work out, we will demo as early as 2026.

I don't understand how the demolition loss factors in - either this year or next year - I just know we need some tax write-offs this year!

Josh L. · Answer

@Bryan Johns It sounds like you’ve got a few moving parts that really call for looking at the full picture. Each route has its own considerations, so it’s something best handled through a more detailed tax planning discussion.

Josh L. · Answer

@Bryan Johns It’s added to the land basis, so there’s no current-year benefit (and no future depreciation benefit, since land isn’t depreciable). It essentially gets “stuck” on your balance sheet until you sell, at which point it reduces your taxable gain (ie higher land basis). Demolition costs can have some nuances, and there are potential workarounds, but those get technical with their own pitfalls and would depend on your specific facts.

Bryan Johns · Answer

Interesting... If another business of mine is planning to build out an office on the land that is being demolished, it would therefore have an interest in the work. Given that, can that business (currently operating and generating income) pick up the demo bill as a necessary expense for growth? Or would that just transfer the demo cost to another the balance sheet where it gets stuck? Is there any way to deduct this expense this year?

Rohullah Sharifi · Answer

I would recommend considering cost segregation on the new building rather than the current one. Since the cost basis of the new property will be higher, the potential depreciation benefits from cost segregation will also be greater.

If you proceed with cost segregation on the current property now and subject to depreciation recapture, which could reduce your adjusted basis and potentially increase your tax liability upon sale.

Timing and property selection are important when applying this strategy, so it may be more beneficial to wait and implement it on the new acquisition.

Cost seg and then demo?

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