Rental Property - Abandoned Oil Tank Removal Deduction/Capitalization

[robustrevival]

Hi all, 

I have a rental property and last year I did major land improvements to rebuild a retaining wall. When they were excavating, the contractor uncovered a previously certified abandoned oil tank that needed to be removed. I ended up hiring an environmental company to remove it. 

Im seeing some conflicting advice online on deducting/ capitalizing oil tanks. One post I read said if it is removed and not replaced you can deduct but the way I read the IRS guidance is that anything that increases your property value needs to be capitalized. Just wanted to get some clarification. 

Thanks

[DaveF1006 · Accepted solution]

Yes, this is a gray area that requires a judgment call where there may not be a right or wrong answer. This is why you are receiving conflicting answers. There are some things you need to consider which would fit your situation.

1. If the removal of the oil tank is considered an ordinary and necessary expense for maintaining the property in its current condition, it would be deductible.  
2.  If the removal of the oil tank is part of a larger project that improves the property, increases its value, or adapts it to a new use, the costs must be capitalized under Section 263. This would include situations where the removal is necessary to prepare the land for new construction or other significant improvements.
3. The IRS has specific rules for environmental cleanup costs. If the removal of the oil tank was necessary to remediate contamination and restore the property to its original condition, these costs might be deductible. However, if the cleanup significantly improves the property or prepares it for a new use, the costs would need to be capitalized.

In reading 26 U.S. Code § 198, "a Taxpayer may elect to treat any qualified environmental remediation expenditure which is paid or incurred by the taxpayer as an expense which is not chargeable to capital account". Select the link to read more about this provision.

In my own opinion as a tax expert, you may expense this under 26 US Code 198.  I don't see ‌this as an improvement in property value since you weren't aware of this until it was uncovered. I can't see a sudden rise in property value since this oil tank was removed.

In summary, I hope I have given you some things to consider that require a judgment call at best. I can see why you received so many conflicting opinions

[robustrevival]

I was originally leaning towards capitalization but after reading the guidance you linked, I am agreeing that this may be an expense.

I knew that there was an abandoned oil tank somewhere on the property but the location was removed from all records and surveys. I believe the contractor could have worked around it because it was certified abandoned 20 years ago but I decided to remove it because of the nature of these oil tanks. When the environmental contractor was pumping out the contents, they found contamination within the tank only so removing it was the right call. Being a 30/40 year old cast iron oil tank, it was only a matter of time before it contaminated the surrounding area so I think I'm lucky in that regard. 

Thanks again for a great response and helping me work through some of these tax issues.