Demolition of Rental Property

Mike_A

Last year I demolished a rental property which consisted of a main house and a garage apartment. Only the garage apartment was being rented, and I had created it as a depreciable asset in my 2023 return. I am trying to capture it correctly in FTUSA software. Here is what I have done:

Basic Rental Info: Selected "Yes" on "Did you sell or dispose of your entire interest…."

Depreciable Asset "Garage Apartment":

• "Date Sold, Disposed of, or Retired" - last day of rental of garage apartment.
• "Original Cost or Basis" - only cost of garage apartment during property purchase (no land)
• Selected "I sold or disposed of it (normal sale or disposal)
• "Cost of Land" - $0
• "Sales Price and Expenses" - $0

It shows me a depreciation summary consisting of previous years and 2024. I understand that the new cost basis will consist of:

• cost of land only from original property purchase
• total depreciation
• cost of any future construction on the property

Can someone please tell me if I am getting this?

CoryF

Hello, Mike

You did a great job in understanding the rules for demolition.

This is what happens.

1. The original value of the property that exists before demolition minus the accumulated depreciation results in a Book Value of the property at the time of demolition. The Book Value of the property then gets added to the value of the land and the land value gets set aside for the future cost basis of the Land.
2. You account for the demolition costs of clearing the buildings from the property using this definition from Publication 551 page 6 "Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. Don't claim the costs as a current deduction."
3. Your future building cost basis becomes the new cost basis when the property is available to rent.

In summary, the land value (old land cost plus old building book value plus demolition costs) gets accounted for as not depreciable when filling out the Schedule E depreciable assets (new building). Then the new building cost is the new cost basis value to depreciate for your new rental property.