IRS Demolition Rules: Section 280B, Basis, and Lessees

Under the IRS demolition rules, you cannot deduct the cost of tearing down a building. Internal Revenue Code Section 280B requires you to capitalize every dollar of demolition expense, along with whatever adjusted basis the demolished structure still carried on your books, and add the total to the basis of the land underneath. Because land is not depreciable, those costs sit in the land’s basis until you sell the property.¹

What Section 280B Actually Says

The statute is short and absolute. When any structure is demolished, no deduction is allowed for the demolition costs or for any loss on account of the demolition. Both amounts must be charged to the capital account of the land where the structure stood.¹ It applies to owners and lessees alike.

Two separate amounts get folded into land basis. First, your out-of-pocket demolition expenses. Second, whatever adjusted basis the demolished structure still had. If you bought a commercial building for $500,000 ten years ago and have depreciated it down to $200,000, that remaining $200,000 does not produce a deductible loss when the building comes down. It gets added to your land basis.

Intent at the time of acquisition is irrelevant. You could buy a building planning to use it for decades, operate it for twenty years, and then decide to tear it down. Section 280B still governs the demolition. There is no grace period or useful-life threshold that lets you out.

The practical consequence is harsh. Land cannot be depreciated, so parking these costs there pushes any tax recovery out to the date you eventually sell the property. A higher land basis reduces your taxable gain at sale, but the present value of that benefit shrinks the longer you hold. For a developer who breaks ground on a new building the moment the old one is gone, the lag between spending real money on demolition and getting any tax benefit from it can stretch for decades.

Which Costs You Have To Capitalize

The capitalization requirement sweeps broadly, well beyond the wrecking contractor’s invoice.

Direct costs include contractor fees for labor and equipment, municipal permit fees, debris hauling and disposal, backfilling the foundation hole, and rough grading the site afterward. Indirect costs are also pulled in: a share of a project manager’s salary for overseeing the demolition, engineering fees for utility disconnection planning, and pre-demolition work such as asbestos abatement required before the crew can begin.

Salvage value offsets the total. If the contractor pays you $15,000 for recoverable steel and copper and the gross demolition cost is $120,000, the net amount capitalized is $105,000. Keep detailed records of every invoice, permit fee, time allocation, and salvage receipt. Auditors expect a clean paper trail connecting each cost to the demolition event.

What Counts as a Structure

Treasury Regulation 1.280B-1 defines “structure” as a building and its structural components.² Structural components are items permanently attached to the building and integral to its operation: the foundation, plumbing, electrical wiring, heating and air conditioning systems. Tearing those out as part of a demolition triggers the capitalization rule even if the exterior walls stay up.

Tangible personal property is a different animal. Machinery, specialized manufacturing equipment, and movable items like portable office trailers are not structures. Costs to remove or dispose of that kind of property follow the ordinary rules for losses or dispositions of business assets, not Section 280B.

Permanent improvements to the land itself fall into a gray zone. Removing a paved parking lot, a sidewalk, or an in-ground swimming pool to prepare a site for new construction is generally treated as a land preparation cost. Those removal costs get capitalized to the land basis under the same logic, even when the item being removed is not technically a building. You are clearing the land for its intended new use, and land-preparation costs increase the land’s basis.

When Environmental Remediation Can Be Deducted Separately

One area where some costs may escape capitalization is environmental cleanup. Revenue Ruling 94-38 established that a taxpayer can currently deduct the cost of remediating soil or groundwater contamination when the cleanup merely restores the property to its condition before the contamination occurred, rather than improving it beyond its original state.³ Under that ruling, cleanup of contaminated soil is an ordinary business expense, while costs to build permanent treatment facilities must be capitalized.

The hard question is how that principle interacts with Section 280B. If asbestos abatement is performed specifically so a building can be demolished, there is a strong argument that it is an amount expended for the demolition and must be capitalized to the land. But if remediation on the same site addresses pre-existing soil or groundwater contamination that would need to be cleaned up whether or not the building came down, those costs may be separately deductible under Rev. Rul. 94-38. The deciding factor is whether the cleanup is driven by the demolition or independent of it. This is where significant projects warrant professional tax advice before the invoices are coded.

How the Basis Math Works

The arithmetic itself is simple. Your new land basis equals the original land basis, plus the remaining adjusted basis of the demolished structure, plus net demolition costs. For example:

Original land basis: $200,000
Remaining adjusted basis of the building: $100,000
Net demolition costs: $150,000
New land basis: $450,000

That $450,000 is locked into a non-depreciable asset. You cannot deduct any portion of it annually. The only recovery mechanism is a reduced capital gain when you sell the land. Hold it for 15 or 20 years and inflation alone erodes much of the tax benefit that higher basis provides at sale.

The new building you construct on the cleared site is a separate asset with its own depreciable basis. Nonresidential real property depreciates over 39 years, and residential rental property over 27.5 years under the general depreciation system.⁴ You have to allocate costs carefully between land preparation (added to land basis) and construction of the new structure (its own depreciation schedule). Mixing them up is one of the most common errors in redevelopment projects, and it hurts in both directions: misclassifying depreciable building costs as land costs forfeits annual deductions, while misclassifying land costs as building costs creates an audit target.

Lessees Are Covered Too

Section 280B applies to lessees exactly as it does to owners.¹ A tenant who tears down a building on leased land must capitalize the costs, even though the tenant does not own the land. In practice, the lessee treats the capitalized amount as part of their leasehold interest. It is not recoverable through depreciation the way a leasehold improvement would be. It sits in the capital account until the lease terminates or the leasehold interest is sold.

Lessees who demolish at the landlord’s request, or as a lease obligation, sometimes assume they can deduct the cost as a business expense or amortize it over the lease term. They cannot. The statute draws no distinction based on who wanted the building torn down.

Casualties Are Different From Demolitions

Section 280B carves out no exceptions, not even for natural disasters. If a building is demolished, the costs are capitalized.

What matters is distinguishing a demolition from a casualty loss. When a fire, tornado, or other sudden event destroys a building, the building’s remaining adjusted basis may qualify as a casualty loss under Section 165. That is involuntary destruction, not a demolition, and Section 280B does not apply. But if a partially damaged building survives the event and you then hire a contractor to tear down what remains, that teardown is a demolition. The costs and any remaining basis attributable to the structure that was torn down fall under Section 280B.

The IRS will scrutinize claims that a building was fully destroyed by a casualty when demolition crews were brought in afterward. Documentation of the extent of damage — insurance adjuster reports, structural engineering assessments, and photographs — is essential to support a casualty loss position.

Abandonment Does Not Get You Around It

Some taxpayers try to claim an abandonment loss on a building’s remaining basis before physically demolishing it, hoping to deduct the basis under Section 165 and capitalize only the out-of-pocket teardown costs. Section 280B forecloses this. It disallows “any loss sustained on account of such demolition.”¹ If the abandonment is followed by demolition, the IRS treats the loss of basis as sustained on account of the demolition no matter how the taxpayer labels it. The whole amount, remaining basis and physical removal costs together, gets capitalized to the land.

What Happens If You Expense Demolition Instead

Deducting demolition costs as a current expense instead of capitalizing them creates an underpayment of tax. If the IRS catches the error on audit, you owe the additional tax plus interest. An accuracy-related penalty of 20 percent of the underpayment applies when the error results from negligence or a substantial understatement of income tax.⁵

A substantial understatement exists when the understatement exceeds the greater of 10 percent of the correct tax liability or $5,000.⁵ On a large commercial demolition, incorrectly expensing six figures of costs can easily cross that line. The penalty can be avoided if you had reasonable cause for the position and acted in good faith, but “I didn’t know about Section 280B” is unlikely to qualify as reasonable cause for a real estate developer or investor.

1
Office of the Law Revision Counsel. 26 USC 280B – Demolition of Structures
2
GovInfo. 26 CFR 1.280B-1 – Demolition of Structures
3
Internal Revenue Service. Technical Advice Memorandum 9952075
4
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
5
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments