An incentive for investment: How the US tax code can help America rebuild

Gary, Ind., is preparing to demolish the abandoned remains of Gordon’s Department Store, once a prominent downtown destination. The implosion will be part of an $80 million campaign to remove roughly 7,000 vacant and deteriorated properties across a city that has lost more than half its population since 1960.

For many of us in real estate, partial or complete demolition is often understood as the first step toward revitalization. The city is not clearing land merely to create empty lots. It is making room for housing, offices, transportation infrastructure and private investment that cannot take hold amid blocks of unsafe and obsolete buildings.

Gary’s leaders have recognized a truth facing many older American communities — that revitalization sometimes requires preserving the past, sometimes adapting it, and sometimes removing what no longer serves any productive purpose.

Federal tax policy should support all three choices. Instead, the tax code frequently discourages the removal of obsolete buildings, provides too little assistance for preservation in deeply distressed communities, and leaves many promising commercial-to-residential conversions financially infeasible.

Under Section 280B of the tax code, when an owner demolishes a building, the cost of demolition generally cannot be deducted or depreciated. The remaining tax basis in the building cannot be claimed as a loss, either. Both amounts are added to the basis of the underlying land, which is not depreciable.

The result is economically irrational. A building may be vacant and incapable of generating income, and once demolished, it no longer exists at all. Yet the owner is unable to recover the building’s remaining basis or the cash cost of removing it until the land is sold, perhaps decades........

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