Under IRS demolition rules, the money you spend tearing down a building is not deductible. Internal Revenue Code Section 280B requires every dollar of demolition cost, along with whatever adjusted basis the demolished structure still carried, to be added to the basis of the land underneath. Land is not depreciable, so the only way you ever recover those costs is through a smaller taxable gain when you eventually sell the property.
The Section 280B Rule in Plain Terms
Section 280B is short and absolute. When a structure is demolished, no deduction is allowed for the demolition costs or for any loss on account of the demolition. Both amounts get charged to the capital account of the land where the structure stood.1Office of the Law Revision Counsel. 26 USC 280B – Demolition of Structures The rule applies to owners and lessees alike, and it applies regardless of when the decision to demolish was made. You could own and operate a building for twenty years and then decide to tear it down; Section 280B still governs the teardown.
Two things go into the land’s basis. First, the actual out-of-pocket demolition expenses. Second, the remaining adjusted basis of the building itself. If you paid $500,000 for a commercial building and have depreciated it down to $200,000, that $200,000 does not become a deductible loss on demolition. It joins the land’s basis instead.
The practical bite is that land is not a depreciable asset. Parking these costs in the land’s basis pushes cost recovery all the way out to a future sale. A higher land basis reduces your taxable gain then, but the present value of that benefit shrinks the longer you hold the property. For a developer who breaks ground on a new building right after demolition, the gap between spending the money and getting any tax relief can run for decades.
What Counts as a Structure
Treasury Regulation 1.280B-1 defines a “structure” as a building and its structural components.2GovInfo. 26 CFR 1.280B-1 – Demolition of Structures Structural components are the items permanently attached to the building and integral to its operation: the foundation, plumbing, electrical wiring, heating and air conditioning. Tearing them out as part of a demolition triggers the capitalization rule even if the exterior walls stay up.
Tangible personal property is not a structure. Machinery, specialized manufacturing equipment, and movable items like portable office trailers follow the ordinary rules for losses or dispositions of business assets, not Section 280B.
Other permanent improvements to land sit in a gray area. Removing a paved parking lot, a sidewalk, or a swimming pool to prepare a site for new construction is generally treated as a land preparation cost. Those removal costs get added to the land basis under the same logic, since you are clearing the land for its intended new use.
Which Costs Get Swept In
The capitalization requirement reaches well beyond the wrecking contractor’s invoice. Direct costs include contractor labor and equipment, municipal permit fees, debris hauling and disposal, backfilling the foundation hole, and rough grading afterward. Indirect costs also get pulled in: a share of the project manager’s salary for overseeing the work, engineering fees for utility disconnection planning, and pre-demolition items like asbestos abatement that must happen before the crew can start.
Salvage value offsets the total. If a contractor pays you $15,000 for recoverable steel and copper against a $120,000 gross demolition cost, the net amount capitalized is $105,000. Keep the invoices, permit receipts, time allocations, and salvage records. Auditors expect a clean paper trail tying every dollar to the demolition event.
Environmental Cleanup May Be a Separate Question
Not every cost incurred alongside a demolition is necessarily a demolition cost. Revenue Ruling 94-38 held that a taxpayer can currently deduct the cost of remediating soil or groundwater contamination when the cleanup merely restores the property to its pre-contamination condition rather than improving it beyond that state.3Internal Revenue Service. Technical Advice Memorandum 9952075 Under that ruling, soil cleanup costs can be ordinary business expenses, while permanent treatment facilities have to be capitalized.
The hard question is what happens when environmental work overlaps with a demolition. If asbestos abatement is performed specifically to enable the teardown, a strong argument exists that it is an amount expended for the demolition and must be capitalized to the land. But if the same site has pre-existing soil or groundwater contamination that would require cleanup even without a demolition, that remediation may still qualify for a current deduction under Rev. Rul. 94-38. The pivot is whether the cleanup is driven by the demolition or independent of it. This is a place worth getting professional advice before filing.
Calculating the New Land Basis
The math is straightforward. Your new land basis equals the original land basis, plus the remaining adjusted basis of the demolished structure, plus net demolition costs. A worked 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 of it annually. It only comes back through a reduced capital gain at sale, and if you hold the land for 15 or 20 years, inflation alone erodes much of that benefit.
The new building you put up 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.4Internal Revenue Service. Publication 946 (2025), How To Depreciate Property Costs have to be carefully split between land preparation, which increases land basis, and construction of the new structure, which gets its own depreciation schedule. Mixing these up is one of the most common errors in redevelopment projects, and it hurts both ways: misclassifying building costs as land costs forfeits annual deductions, while pushing land costs into the building creates an audit target.
Lessees Are Covered Too
Section 280B applies to lessees the same as owners.1Office of the Law Revision Counsel. 26 USC 280B – Demolition of Structures A tenant who demolishes a building on leased land has to capitalize the costs to the land’s capital account even though the tenant does not own the land. In practice, the lessee treats the capitalized amount as part of the leasehold interest. It is not recoverable through depreciation the way a leasehold improvement would be. It sits in the capital account until the lease ends or the leasehold is sold or otherwise disposed of.
Lessees who demolish at the landlord’s request, or to satisfy 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 gone.
Casualty Losses Are Not Demolitions
Section 280B has no exceptions. It does not carve out casualties, natural disasters, or anything else. If a building is demolished, the costs are capitalized.
What matters is the difference between a demolition and a casualty loss. When a fire, tornado, or similar event destroys a building, the building’s remaining adjusted basis may qualify as a casualty loss under Section 165. That is involuntary destruction, and Section 280B does not apply. But if a partially damaged building survives the event and the owner then hires a contractor to tear down what remains, that is a demolition. The teardown costs and any remaining basis attributable to what was removed fall under Section 280B and go to the land.
The line between “destroyed by the event” and “demolished afterward” can be blurry, and the IRS will look closely at claims that a building was fully destroyed by a casualty when demolition crews showed up afterward. Insurance adjuster reports, structural engineering assessments, and photographs are what support a casualty position.
Abandonment Doesn’t Get You Around the Rule
Some taxpayers try to claim an abandonment loss on the building’s remaining basis before physically demolishing it, hoping to deduct that basis under Section 165 and then capitalize only the out-of-pocket teardown costs. Section 280B blocks this by disallowing any loss sustained on account of the demolition.1Office of the Law Revision Counsel. 26 USC 280B – Demolition of Structures If abandonment is followed by demolition, the IRS treats the lost basis as sustained on account of the demolition regardless of how the taxpayer labeled it. The remaining basis and the physical removal costs all get capitalized to the land.
What It Costs to Get This Wrong
Deducting demolition costs as a current expense instead of capitalizing them creates an underpayment. If the IRS catches it on audit, you owe the additional tax plus interest. On top of that, an accuracy-related penalty of 20 percent of the underpayment applies when the error stems from negligence or a substantial understatement of income tax.5Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
A substantial understatement exists when the understatement exceeds the greater of 10 percent of the correct tax liability or $5,000.5Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments On a large commercial demolition, expensing six figures of costs the wrong way easily trips that threshold. The penalty can be avoided if the taxpayer had reasonable cause and acted in good faith, but “I didn’t know about Section 280B” is unlikely to clear that bar for a real estate developer or investor.