There are three possibilities:

#1 You can capture the town and keep it, you need a free city control point.
#2 Same as above, but after you capture it, you can discard it again, it will become neutral. You can discard one city per 30 days for free, a higher frequency of discarding will cost gold.
#3 Small cities can be completely destroyed, leaving an empty square in the valley. I think "small" is less than 500 in rating.

Remeber that you need a war pact with a player to capture his town.