Cost basis of a torn down and rebult home

Technical topics regarding tax preparation.
#1
Posts:
716
Joined:
15-Jun-2019 8:24am
Location:
Virginia
Suppose a single taxpayer bought a house for 100K, lived there for 6 years, then torn down the house, rebuilt a new one, and sold it. Suppose the cost to tear it down is 30K, and to rebuild it is 150K, and the house was sold for 400K.

I would like to know what is the cost basis of the house in computing the capital gain, ignoring all other costs.

PS: Per the court case https://www.leagle.com/decision/intco20100701f23 , the taxpayer cannot use 121 exclusion.
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#2
Posts:
8156
Joined:
4-Mar-2018 9:03pm
Location:
The Office
Take a look at IRC Sec 280B.
 

#3
Posts:
716
Joined:
15-Jun-2019 8:24am
Location:
Virginia
ManVsTax wrote:Take a look at IRC Sec 280B.


ManVsTax: Thanks for your reply. Suppose when the taxpayer bought the house for 100K, 20K is the land and 80K is the building. The IRC states the costs are allocated to the land, so the basis of the land becomes:

20K + 80K (loss) + 30K (demolition) = 130K

and the basis of the building is 150K.

Suppose before the demolition, there was a rental period that has depreciated 10K, then the basis of the land becomes:

20K + 70K (loss) + 30K (demolition) = 120K

and the basis of the building stays the same 150K.

Do you agree with above computation? Thanks.
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#4
Nilodop  
Posts:
18761
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Suppose before the demolition, there was a rental period that has depreciated 10K, .... Immediately before or a while back?
 

#5
Posts:
716
Joined:
15-Jun-2019 8:24am
Location:
Virginia
Nilodop wrote:Suppose before the demolition, there was a rental period that has depreciated 10K, .... Immediately before or a while back?


Nilodop: I do not know why this matters, can you elaborate the different treatment in each situation please?
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#6
Posts:
5702
Joined:
21-Apr-2014 7:21am
Location:
The Land
puravidatpt wrote:
PS: Per the court case https://www.leagle.com/decision/intco20100701f23 , the taxpayer cannot use 121 exclusion.

Yeah, “per the court case.” But did you know this case was appealed, docketed and then poof…disappeared? Any idea why that might be?
 

#7
Nilodop  
Posts:
18761
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Nilodop: I do not know why this matters, can you elaborate the different treatment in each situation please?

Well, others might disagree, but I think 280B's relevance is only to a
deduction otherwise allowable under this chapter
. If the rental aspect is a while back, the property is now personal and so is the demolition.

My interpretation assumes
(2) amounts described in paragraph (1)
refers to the entirety of (1), not just (A) and (B). We'd revert to the rules that applied pre-280B to a demolition loss on a personal-use property, which I think were that the loss is personal, not deductible, and, if the demo was not intended at the time the property was purchased, not added to basis of land.
 

#8
Posts:
716
Joined:
15-Jun-2019 8:24am
Location:
Virginia
Jeff-Ohio wrote:But did you know this case was appealed, docketed and then poof…disappeared? Any idea why that might be?


Jeff-Ohio: I do not know. I did try to get the "official" link for the court case, but I could not. Can you send info to show "this case was appealed,, docketed, and disappeared"? Thanks a lot.
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#9
Posts:
8156
Joined:
4-Mar-2018 9:03pm
Location:
The Office
puravidatpt wrote:I do not know.


Start by reading the dissenting opinion in that case.

Then, take a look at this:

https://www.chamberlainlaw.com/assets/h ... operty.pdf
 

#10
Posts:
716
Joined:
15-Jun-2019 8:24am
Location:
Virginia
ManVsTax wrote:
puravidatpt wrote:I do not know.


Start by reading the dissenting opinion in that case.

Then, take a look at this:

https://www.chamberlainlaw.com/assets/h ... operty.pdf


ManVsTax: Thanks for the info. I have two conclusions: [a] The capital gain on land can be excluded as the case did not rule on that; [b] despite of the dissenting opinion, this is still the current law. What do you think?
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#11
Nilodop  
Posts:
18761
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
That part about still excluding the capital gain on the land is interesting. I'll have to think about it.

Also, based on the title of this thread, the question requires us to determine the tax basis of the property sold. I don't know that we've concluded. This quote from the link in #9 seems to say that the loss on demolition gets added to the land basis.
In light of this judicial authority, the dissenting opinion stated that it would not be an "impossible stretch" to consider the demolition of the Old House in Gates as a sale for zero dollars followed by a subsequent sale of the Land. Under that approach, the demolition/sale of the Old House would generate a nondeductible loss with the basis going to the Land under Section 280B; any gain attributable to the Original House would be realized on the sale of the New House and the Land, and Section 121 would apply.
. I reached a different conclusion in #7, based on the loss being on a personal-use asset, not one used in business or held for investment. I based my reasoning on the part of Sec 280B that says
In the case of the demolition of any structure—
(1) no deduction otherwise allowable under this chapter
. Am I correct?
 

#12
Posts:
8156
Joined:
4-Mar-2018 9:03pm
Location:
The Office
Nilodop wrote:I reached a different conclusion in #7, based on the loss being on a personal-use asset, not one used in business or held for investment. I based my reasoning on the part of Sec 280B that says
In the case of the demolition of any structure—
(1) no deduction otherwise allowable under this chapter
. Am I correct?


The absorption of the personal residence cost basis into the land under 280B is also mentioned in the dissenting opinion in Gates. I agreed with your reading of 280B back around post #7, but perhaps we are reading it wrong?

Based on the face value of the text, 280B is saying that if a structure is demolished, and that demolition would have otherwise produced a deductible tax loss, no deduction shall be allowed for the expenses allocated to the demolition nor for the loss on the structure. Instead, those costs and expenses are absorbed into the cost basis of the land.

I don't think we can then infer from 280B that if the deduction is otherwise not allowable, 280B won't apply. Right?

I'm reading 280B as silent on a personal-use structure.
 

#13
dave829  
Account Deactivated
Posts:
1482
Joined:
9-Jan-2018 9:28pm
Location:
California
puravidatpt wrote:
Jeff-Ohio wrote:But did you know this case was appealed, docketed and then poof…disappeared? Any idea why that might be?

After the case got to the 9th Cir. Court of Appeals, the Gates’ filed their opening brief (2/11/2011), the court granted an extension (to 3/28/2011) for the IRS to file its brief, and then the parties reached a settlement and filed a joint stipulation of dismissal (3/16/2011).
 

#14
Nilodop  
Posts:
18761
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
I don't think we can then infer from 280B that if the deduction is otherwise not allowable, 280B won't apply. Right?
. I absolutely infer that. If the demo expenses and loss are not allowable, what would make them allowable? I'm reading 280B as silent on a personal-use structure.. OK, I guess you are saying that 280B might still put them into the land basis.

I hope so, but it's not how I read it, as I said above in #7. In the case of a personal residence, I've always assumed you'd add the expenses and loss on demo to the land if at the time of purchase you had the intention to demolish. But to me that implies that, absent the intention at that time, the "normal" rules would apply. Interestingly enough, reg. 1.165-3 pretty much sets the same rules as section 280B, but it also applies to
a trade or business or in a transaction entered into for profit
.

I have found no Rev Ruls or PLRs or cases that addressed the basis after demoiition of property that was not trade or business or investment property.
Last edited by Nilodop on 17-Feb-2020 9:45am, edited 1 time in total.
 

#15
Posts:
716
Joined:
15-Jun-2019 8:24am
Location:
Virginia
dave829 wrote:After the case got to the 9th Cir. Court of Appeals, the Gates’ filed their opening brief (2/11/2011), the court granted an extension (to 3/28/2011) for the IRS to file its brief, and then the parties reached a settlement and filed a joint stipulation of dismissal (3/16/2011).


dave829: How did you know all those? Do you have a link? I search on the case, all I could find are some writing based on the case. Knowing what you know, Can you conclude differently?
Please consider visiting this post where my question at the end has not been answered yet:
viewtopic.php?f=8&t=12065, thanks!
 

#16
dave829  
Account Deactivated
Posts:
1482
Joined:
9-Jan-2018 9:28pm
Location:
California
You can access the docket list and all documents for the 9th circuit case through www.pacer.gov. The attorneys must have read something in the Gates' opening brief that worried them.
 

#17
mscash  
Posts:
517
Joined:
28-Apr-2014 1:26pm
Location:
Modesto, California
That would depend on if the taxpayer lived in the new building. In the Gates case the taxpayers never moved in to the new building so it was not their principal residence. The Gates case was appealed but the appeal was withdrawn before a decision.
 

#18
Coddington  
Moderator
Posts:
2567
Joined:
21-Apr-2014 8:50pm
Location:
Fort Worth, TX
Or the DOJ attorneys had a different view of the merits than the Service and the opening brief clinched it.

When I look at 280B, I think it can be read as:

In the case of the demolition of any structure— [any amount expended for such demolition, or any loss sustained on account of such demolition] shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located.

The section does two things, prohibits any otherwise allowable loss AND mandates that demolition costs and any sustained demolition loss are capitalized to land. Does "sustained" mean "otherwise allowable"? I could see it going either way, (though favoring the latter).
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#19
Posts:
499
Joined:
27-Apr-2015 1:37pm
Location:
Northwest
[quote="Coddington"]Or the DOJ attorneys had a different view of the merits than the Service and the opening brief clinched it.

When I look at 280B, I think it can be read as:

In the case of the demolition of any structure— [any amount expended for such demolition, or any loss sustained on account of such demolition] shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located."

That is contradicted by 26 CFR § 1.165-3

(b) Intent to demolish formed subsequent to the time of acquisition.

(1) Except as provided in subparagraph (2) of this paragraph, the loss incurred in a trade or business or in a transaction entered into for profit and arising from a demolition of old buildings shall be allowed as a deduction under section 165(a) if the demolition occurs as a result of a plan formed subsequent to the acquisition of the buildings demolished. The amount of the loss shall be the adjusted basis of the buildings demolished increased by the net cost of demolition or decreased by the net proceeds from demolition. See paragraph (c) of § 1.165-1 relating to amount deductible under section 165. The basis of any building acquired in replacement of the old buildings shall not include any part of the basis of the property demolished.
 


Return to Taxation



Who is online

Users browsing this forum: beardenjv, Google [Bot], JoJoCPA, kyle242gt, SumwunLost, taxp2345, Terry Oraha, TheGrog, WiscoTax and 165 guests