Abandonment Studies

Thinking about demolition or major renovation?

An Abandonment Study can legitimately generate a windfall of depreciation for the owner of investment or owner-occupied real estate. By increasing depreciation, substantial tax reduction can be attained. An abandonment study is appropriate when it is necessary to demolish or substantially renovate tenant improvements within a building. When existing tenant improvements are demolished, the undepreciated basis for the tenant improvements can be deducted in the year in which it is realized they no longer have value or when the demolition occurs. The current owner can deduct the undepreciated cost of the tenant improvements even if the prior owner disbursed payments for the tenant improvements. The tax cut available from improvements installed by previous owner or tenant is not intuitive. An abandonment study identifies the value of the demolished or renovated property.

If the current owner paid for the tenant improvements, the remaining cost basis is simple to calculate in an abandonment study. However, if a prior owner paid for the tenant improvements, it is unlikely cost data is available to the current owner. Further, even if cost is available to the current owner, that cost is not necessarily the current owner's initial or undepreciated cost basis. (For an abandonment study, it is not relevant whether the current owner paid for the tenant improvements. If the prior owner or even the tenant paid for the tenant improvements, and the owner did not expect the tenant to be leaving at the time of acquisition, an abandonment study identifies the tenant improvements as a portion of the assets purchased.) Tax help can originate from unexpected sources.

By obtaining an abandonment study, the current owner can determine the undepreciated cost basis for the tenant improvements which are being abandoned. This abandonment study will identify the replacement costs of the assets, extract an appropriate cost basis for the improvements being abandoned from the current owner's purchase price and calculate a depreciated cost basis which may be deducted from the tenant improvements.

Depreciation of tenant improvements is a difficult process to execute effectively. Accurately depreciating tenant improvements can substantially reduce income tax liability and increase both cash flow and total investment return.


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