News Archive: Ask the Professional - My apartment building is 20 years old and in need of an upgrade. What happens if I just demolish it and start over?

For Immediate Release:
February 12, 2010

JAMES KOHLES, Chairman of the Board
jkohles@rina.com • 925-210-2180
1220 Oakland Blvd., Suite 300
Walnut Creek, CA 94596 • www.rina.com

Q. My apartment building is 20 years old and in need of an upgrade, what happens if I just demolish it and start over?

A. You should be careful about planning a complete demolition of a commercial building. The remaining undepreciated basis of the existing structure and the cost of the demo must be capitalized to land costs per IRS regulations. This is not a good result for tax planning purposes as these amounts do not get depreciated going forward. A better tax plan might be to consider a major renovation in which some part of the original building is retained. How much of the existing structure must be retained to avoid the land cost result is a matter of some judgment so you should consult with an attorney or accountant that is experienced in this area if you decide to do something like this.