Does asbestos remediation affect my basis

However, as there has been litigation regarding asbestos, I would also check to see if any tax cases (federal or state) address your situation. It's possible that the treatment between the two levels of government are different due to some special law passed.

It appears the tax court agrees with you. See NORWEST CORP., 108 T.C. 265, 285 (1997)

On the other hand, that ruling was because asbestos removal was a necessary part of a larger construction project. If asbestos removal had been done on its own, the court implied that it would be deductible because it added significant market value to a building that had its value reduced because of the discovery of the asbestos.

There appears to be an example (see Example 2) in the new repair regulations that addresses this. Specifically, it is in 1.263(a)-(3)(j). I would therefore agree that it is a repair.

(j) Capitalization of betterments?(1) In general. A taxpayer must capitalize as an improvement an amount paid for a betterment to a unit of property. An amount is paid for a betterment to a unit of property only if it? (i) Ameliorates a material condition or defect that either existed prior to the taxpayer?s acquisition of the unit of property or arose during the production of the unit of property, whether or not the taxpayer was aware of the condition or defect at the time of acquisition or production; (ii) Is for a material addition, including a physical enlargement, expansion, extension, or addition of a major component (as defined in paragraph (k)(6) of this section) to the unit of property or a material increase in the capacity, including additional cubic or linear space, of the unit of property; or (iii) Is reasonably expected to materially increase the productivity, efficiency, strength, quality, or output of the unit of property.

(3) Examples. The following examples illustrate the application of this paragraph (j) only and do not address whether capitalization is required under another provision of this section or another provision of the Internal Revenue Code (for example, section 263A). Unless otherwise provided, assume that the appropriate comparison in paragraph (j)(2)(iv) of this section is not applicable under the facts.

Example 2. Not amelioration of pre-existing condition or defect. B owns an office building that was constructed with insulation that contained asbestos. The health dangers of asbestos were not widely known when the building was constructed. Several years after B places the building into service, B determines that certain areas of asbestos-containing insulation have begun to deteriorate and could eventually pose a health risk to employees. Therefore, B pays an amount to remove the asbestos-containing insulation from the building structure and replace it with new insulation that is safer to employees, but no more efficient or effective than the asbestos insulation. Under paragraphs (e)(2)(ii) and (j)(2)(ii) of this section, an amount is paid to improve a building unit of property if the amount is paid for a betterment to the building structure or any building system. Although the asbestos is determined to be unsafe under certain circumstances, the presence of asbestos insulation in a building, by itself, is not a preexisting material condition or defect of the building structure under paragraph (j)(1)(i) of this section. In addition, the removal and replacement of the asbestos is not for a material addition to the building structure or a material increase in the capacity of the building structure under paragraphs (j)(1)(ii) and (j)(2)(iv) of this section as compared to the condition of the property prior to the deterioration of the insulation. Similarly, the removal and replacement of asbestos is not reasonably expected to materially increase the productivity, efficiency, strength, quality, or output of the building structure under paragraphs (j)(1)(iii) and (j)(2)(iv) of this section as compared to the condition of the property prior to the deterioration of the insulation. Therefore, the amount paid to remove and replace the asbestos insulation is not for a betterment to the building structure or an improvement to the building under paragraph (j) of this section.

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Notwithstanding the example, it would seem to me that a building without asbestos would be of higher quality than one with asbestos. Even purely in economic terms, I would pay more for an asbestos-free property than one that wasn't all other things being equal. I find the dismissal of the quality argument to be rather odd.

I would guess that the example indicates how the IRS would want to treat this, though, even if an example doesn't really have the same force as a regulation itself. So I suppose if you wanted to capitalize this, you would potentially have to fight for that treatment.

Digression: Now, this is also an area where the interests of private owners versus commercial owners would diverge. I believe that in general, for commercial owners it is more beneficial to have a deductible repair than a capitalized betterment. However, for private owners the reverse is true, because repairs to personal real estate are not deductible, whereas capitalized expenses add to the basis and thus reduce future taxes.

I have looked at a few cases recently dealing with this point. Since having asbestos diminishes the value of a building, replacing the asbestos with something else doesn't enhance the value of the building, but merely restores it to where it should be. As a result it is considered a repair.

If you want it to be considered a capital expenditure, you will have to argue that you are doing more than merely replacing it with something of what is supposed to be of equal qualify.

Such as, per the cited case, including the asbestos removal as part of a more encompassing renovation/remodel.

I posted the final regulation. Most regulations provide examples. The example cited is from the final regulation and explains why the removal of asbestos is not a betterment.