…with the release of Internal Revenue Bulletin 2014-54, T.D. 9689 (Guidance Regarding Dispositions of Tangible Depreciable Property)
New Rules for Partial Disposal of Commercial Property Assets
Unique, Opportunity for Owners of Commercial Real Estate to Create Significant Increased Cash Flow.
Even More Importantly ….
With additional guidance by the IRS in Revenue Procedure 2014-54, which was issued on October 6, 2014, taxpayers who partially demolish and abandon building assets are allowed to make what is called Partial Dispositions and take the entire write-off of the unadjusted depreciable basis on their current year tax return. No amended tax returns are required nor do taxpayers have to spread the loss over future tax returns.
Additionally, if the loss adjustment exceeds the benefit that can be utilized by the taxpayers on their 2014 tax return, the excess can be carried-back up to two years, or forward into future tax years until all of the benefits are utilized.
Process Required to Make Partial Dispositions …
Determining the costs and identifying the adjusted remaining tax basis in these Ghost Assets will allow the taxpayer significant additional depreciation in the current tax year. Under the final regulations, the IRS is allowing reasonable estimating procedures to quantify the cost of the assets abandoned in commercial real estate. This allows major unclaimed depreciation for those building owners that have performed renovations within their buildings in the current tax year.
Required to be documented per the IRS, a detailed Abandonment Study engineering report similar to that provided for a Cost Segregation Study, will quantify the remaining adjusted tax basis of the Ghost Assets when demolished and removed.
|Key Aspects of this New Law Include:
· The new law is available to all taxpayers who own commercial real estate:
Corporations, Partnerships, LLCs, and Individuals.
· There is no requirement to file any amended federal tax returns.
· All of the Partial Dispositions for the current tax year must be taken on the current
federal tax return.
· The Partial Disposition and resulting expense adjustment is automatically approved
by the IRS.
· If the taxpayer has a loss in current tax year, the loss can be carried back two years,
or forward to future tax years.
· Costs to be written off must be properly documented and the IRS specifically approves
“a study allocating the cost of the asset to its individual components.”
An owner of commercial real estate acquired and placed in service a $4 million building and its structural components in 2005. The owner depreciates this building and its structural components as 39-year property. In 2015 the owner made major renovations and improvements to the building totaling $1 million. On the owner’s federal income tax return for the taxable year ended December 31, 2015, the owner did not recognize a loss on the retirement of structural components which were removed. The owner also capitalized the $1 million cost of the improvements and has continued to depreciate the structural components since 2010.
The owner complies with the new rules beginning with its taxable year ending December 31, 2014. The owner also decides to make the Partial Disposition election for the structural components that were physically retired in 2015. An Abandonment Study is performed that documents that the remaining adjusted tax basis of the retired assets was $250,000. The Late Partial Disposition allows the owner to expense the entire $250,000 on its 2015 federal income tax return.
Key Point for CPA’s ….
Practitioners who have clients with commercial real estate holdings need to review the current fixed asset system to determine if making a Partial Disposition election will benefit their clients. The automatic accounting change rules will apply to a Partial Disposition election. However, Form 4797 will still need to be filed.
For More Information ….
For more information about how an Abandonment Study can provide the needed analysis and documentation required to implement the Partial Disposition election provided under Revenue Procedure 2014-54
New, as of September 2, 2014 with the release of Tax Directive 9689 (Guidance Regarding Dispositions of Tangible Depreciable Property)
These new rules are part of the IRS’ ten year effort to revamp code sections 263(a) and 162(a) regarding the capitalization of assets.
In the past when a taxpayer renovated an existing commercial building they were not allowed to write-off the remaining basis of the structural components being abandoned or demolished. This usually consisted of such items as walls, flooring, roof, HVAC systems and portions of lighting, plumbing and electrical systems. The IRS required that these items remain on the Asset Ledgers and continue to be depreciated, even though they were no longer physically in the building. These assets have been commonly referred to as Ghost Assets.
Under the new rules, effective January 1, 2014, owners of commercial real estate can now assign a value to the 39-year components that are replaced and write-off and treat as a deductible expense the remaining adjusted tax basis. These Partial Dispositions can be taken during the current tax year.