Sec. 280B provides that “in the case of the demolition of any structure . . . any amount expended for such demolition, or . . . any loss sustained on account of such demolition . . . shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located.” Regs. Sec. 1.280B-1(b) further explains that the term “structure” is a building, including its structural components, as defined in Regs. Sec. 1.48-1(e). .
For situations where only parts of a building structure are demolished, the IRS has provided a safe harbor for purposes of determining whether structural modifications to a building are considered a demolition (see Rev. Proc. 95-27). The safe harbor indicates that modifications will not be treated as a demolition for purposes of Sec. 280B if: (1) 75% or more of the existing external walls of the building are retained in place as internal or external walls; and (2) 75% or more of the existing internal structural framework of the building remains in place.
it would seem that you do not meet the safe harbor limits. therefore, I believe that the net depreciated cost of the part demolished gets gets added to the land including demolition costs. costs of renovating get added to cost basis of the building
some research I did has indicated that three is no depreciation recapture on the part that was demolished. however, if would seem that depreciation recapture would apply to the portion renovated
