FAQs for Victims of Hurricanes Katrina, Rita and Wilma, Victims of the May 4, 2007, Kansas Storms and Tornadoes, and Victims of the Midwestern Disasters of 2008
Q: Does the deduction for 50 percent of cleanup costs only apply to trades and businesses?
A: A taxpayer can claim a current deduction for 50 percent of any qualified Gulf Opportunity Zone clean-up costs paid or incurred on or after August 28, 2005, and before January 1, 2008. This deduction only applies to amounts that would otherwise be capitalized. Thus, amounts that could be deducted without regard to this provision continue to be currently deductible regardless of when paid or incurred.
Normally, the adjusted basis of a structure that is demolished and the cost of demolition (less any salvage) is capitalized and added to the basis of the land on which the structure is located. In addition, normally debris removal costs that are in the nature of replacement of part of the property that is damaged must also be capitalized and added to the basis of the property that was damaged.
A qualified Gulf Opportunity Zone cleanup cost is an amount paid or incurred for the removal of debris from, or the demolition of structures on, real property which is located in the Gulf Opportunity Zone if the real property is either (1) held by the taxpayer for use in a trade or business or for the production of income, or (2) inventory in the hands of the taxpayer. The Gulf Opportunity Zone is the area declared as a federally-declared disaster area by reason of Hurricane Katrina.
The deduction is only available for the cost of demolishing structures and removing debris. Any unrecovered basis of a building or structure at the time of demolition still needs to be added to the basis of the land by the owner or lessee, as under present law. The basis of a building is reduced by the amount of a casualty loss that a taxpayer claims with respect to the structure. Please refer to Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, page 15 for more information.
Similar relief with respect to demolition and clean up costs was also made available to taxpayers affected by the May 4, 2007 Kansas Storms and Tornadoes and certain of the Midwest Disasters of 2008.