J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

42.13 Demolishing a Building

When you buy improved property, the purchase price is allocated between the land and the building; only the building may be depreciated. The land may not (42.1). If you later demolish the building, you may not deduct the cost of the demolition or the undepreciated basis of the building as a loss in the year of demolition. Expenses or losses in connection with the demolition of any structure, including certified historic structures, are not deductible. They must be capitalized and added to the basis of the land on which the structure is located.

Major rehabilitation.

Where you are considering a major rehabilitation of a building that involves some demolition of the building, IRS guidelines may allow you to deduct the costs of demolition and a removal of part of the structure. Under the IRS rules, the costs of structural modification may avoid capitalization if 75% or more of the existing external walls are retained as internal or external walls and 75% or more of the existing internal framework is also retained. For certified historic structures, the modification must also be part of a certified rehabilitation.