About Demolition Cost Tax Deductions

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In recent years, hurricanes, flooding and tornadoes have left many homes standing but unlivable. For the homeowner to build anew, first requires the demolition of the uninhabitable house. This can be costly at a time when a homeowner is looking for ways to save in order to get by until a new home can be built. In situations where many homes are damaged, the federal government has allowed a certain amount of demolition costs to be deducted from the homeowner’s federal income taxes.

Special Deduction

After extensive natural disasters, the federal government has recognized the need to give homeowners financial relief. After hurricanes Katrina, Rita and Wilma and the Kansas tornadoes, homeowners were able to deduct half of their clean-up costs. This particular deduction ended in 2008, but another natural disaster could bring about a similar credit.

Casualty Loss

To take such deductions when available, homeowners need to itemize their deductions on Form 1040 Schedule A. You will also need to file Form 4684 Casualties and Thefts. You can fill out the information about the cost of your demolitions and enter the total on Schedule A. The amount you deduct as a casualty loss cannot be added to your adjusted basis to reduce your capital gains later.

Adjusted Basis

While demolition costs cannot normally be taken as a deduction, homeowners can still recover their costs when the property sells. This is done by adding demolition costs to the property basis. This will minimize any capital gains taxes that will be owed on the property when it sells.

How It Works

If your home cost $100,000 and sells for $175,000, the capital gain is the difference between the sales price and the cost or $75,000. However, if your $100,000 home is damaged and needs to the demolished, the $10,000 is added to your cost of $100,000. The property now has no house on it, though, so it may only be worth the value of the land, say, $25,000. If you then sell the property, you will calculate the capital loss as $25,000 minus $110,000 or a loss of $85,000.

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