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Deduction for eminent domain

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Level 2

Hi everyone,

I have a bit of a complex eminent domain situation with a client. On the client's parcel, there's a section with land and a section with a building. The government acquired the land through eminent domain but not the building portion. They government is planning to rent the building portion for 3 years. However the government is asking for the client to demolish the building.

Now I was wondering is there any way to write off the building and expense the demolition costs. I did some research and found Treas. Reg. 1.280B-1 (https://www.law.cornell.edu/cfr/text/26/1.280B-1) which would disallow this deduction and require the amount be capitalized to land. But I did find one court cast that allowed a deduction in De Cou v. Comm'r (https://casetext.com/case/de-cou-v-commr-of-internal-revenue). Though in that case, the ruling said that a deduction would be allow for cases of abnormal retirement caused by casualty to or an extraordinary obsolescence. But my question is eminent domain considered casualty or extraordinary obsolescence since the government wanted it right away?

So I think I have 2 solutions:

1) Take the write off of the adjusted basis of the building and expense the demolition costs by claiming it is casualty and the government acquired it right away through eminent domain.

2) Capitalize the adjusted basis of the building and demolition costs to the land underneath the building

I'm thinking based on my research, #2 is the right answer. Would you all agree?

Thanks in advance for any help.

0 Cheers