If I demolish part of a building down to the floor joists (or foundation) and rebuild it into one larger non-residential structure combining old and new areas, is the work taxed as new construction or as remodeling?

Plain-English Summary

A taxpayer planned to demolish part of a non-residential building — area "A" — down to its floor joists, then rebuild it while also incorporating existing add-on areas "B" and "C" and some additional square footage, all combined into one new structure. The contract would separately state charges for new construction versus remodeling, and the taxpayer asked the Comptroller how to classify the work for sales tax purposes.

The Comptroller's answer turns on how far down the structure is torn apart. Completely razing a building to its foundation and erecting a new facility on that foundation counts as new construction. Critically, for a pier-and-beam building, the piers themselves are treated as the foundation. So demolishing a pier-and-beam building (or a portion of one, like area "A") only down to its first floor joists — leaving the piers/foundation in place — is remodeling, not new construction, even though most of the structure above the foundation is being torn out and rebuilt.

The ruling extends this logic to the add-on areas: any work performed on existing add-on areas "B" and "C" is also remodeling, since those areas aren't being razed to the foundation either. Only the truly additional square footage — the portion that isn't part of areas "A," "B," or "C" — is treated as new construction, and only if it is broken out separately in the billing.

What This Means For You

Contractors and builders

The dividing line between "new construction" (generally taxable differently than remodeling under Texas sales tax rules) and "remodeling" depends on whether you tear a structure down to its foundation or stop short at the floor joists. For pier-and-beam buildings, remember that the piers themselves are the foundation — demolishing everything above the piers but leaving them in place keeps the project classified as remodeling, not new construction, regardless of how extensive the rebuild looks.

Property owners planning a demolition/rebuild project

If you're combining an existing structure with add-on areas and new square footage into a single new building, expect your contractor to separately state new-construction and remodeling charges. Work on existing areas and their add-ons is remodeling unless those areas are razed to the foundation; only genuinely new floor area, broken out separately, qualifies as new construction.

Accountants and tax professionals

This ruling illustrates the Comptroller's foundation-based test for distinguishing new construction from remodeling in mixed demolition/rebuild projects, and confirms that piers count as the foundation for pier-and-beam construction. As with all STAR letter rulings, it is fact-specific and binding only on the requesting taxpayer.

Q&A

Q: We're tearing a building down to the floor joists and rebuilding it — is that new construction or remodeling?
A: Remodeling, according to this ruling — as long as the foundation (including the piers of a pier-and-beam building) is left in place and you don't raze the structure all the way down to it.

Q: What if we raze the building completely to its foundation and build a new facility on it?
A: That is treated as new construction.

Q: We're combining an existing building with add-on areas and extra new square footage into one structure. How is each part classified?
A: Work on the existing building and its existing add-on areas is remodeling (unless razed to the foundation). Only the additional square footage that isn't part of any existing area is new construction, and only if it's separately broken out in the contract.

Citations

No statutes or administrative rules are cited in the body of this letter ruling.

Source

Demolition Or Razing Structure (Building/Swimming Pool/Sidewalk/Pipeline/Manholes) Rebuilding Structure — New Construction Vs Remodeling

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9409L1317A09

Original ruling text

September 14, 1994

Dear *****:

Thank you for your recent letter regarding the tax treatment of a new
construction and remodeling project.

You intend to demolish building area "A" down to the floor joists and
rebuild on it taking in add-on areas "B" and "C" as well as additional
square footage to create a single new structure. You stated that the
completed structure will be a non-residential building and that
charges attributable to new construction and remodeling will be
separately stated in the contract.

Razing a structure to its foundation and building another facility on
it is treated as new construction. The piers of a pier and beam
constructed building are considered to be its foundation. Taking a
pier and beam building or a portion thereof, such as area "A", down
to its first floor joists and rebuilding it will be considered to be
remodeling.

You are correct that any work done to add-on areas "B" and "C" would
also be remodeling. The additional area, not encompassed in areas
"A", "B", or "C" will be considered to be new construction if broken
out separately.

This opinion is rendered based on the facts you submitted. Other
facts, though similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct
line is 512/463-4680. You may also write to Tax Administration,
Comptroller of Public Accounts.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9409373L