The government has acquired my client’s land through eminent domain but not the building portion. The government is planning to rent the building portion for 3 years. However the government is asking for the client to demolish the building. Can my client write off the building?
Assuming that the property was used for the production of income, or held for investment…..and assuming the client has some remaining basis in the property, he would have a loss under the involuntary conversion rules if the proceeds received for the property were less than his basis. There might be an issue as to the exact timing of the loss, for example does he take the loss at the time the building is demolished, or at the time he is denied his desired use of the property, or at the time the government put the Eminent Domain stamp on it? This actually sounds like the makings of a good tax court case. Until that time (whenever it us) he would have have rental income from the building based on the facts presented. You might want to take a look at the Involuntary Conversion rules and tax court cases for the particulars. You might also want to consider asking IRS for a Private Letter Ruling, but these can be costly. Also, remember that if the property was used in a trade or business….any loss would be ordinary.