written by Kevin Hogan
A previous article about the new tax rules for building owners. Click here to view.
Starting in 2012, building owners are required to apply a more restrictive standard for determining whether amounts spent on improving their property should be written-off as a repair or capitalized (and depreciated). These new improvement standards will likely require more building owners to stretch-out the deductions over many years for amounts paid to improve their properties. However, under these same rules, there is an opportunity to deduct a loss in 2012 on building components that have been disposed of in earlier years.
An automatic accounting change allows for a loss to be taken on a structural component that was disposed of in a prior year but is still being depreciated as part of the building. For example, if a full roof replacement was performed two years ago (and capitalized as a separate asset), the automatic accounting method change would allow for a loss to be taken on the 2012 tax return for the unrecovered basis of the roof that was replaced two years ago.
Building owners may have difficulty in determining the basis of a building component for purposes of taking the loss in 2012, because the cost of the replaced building component was included in the building’s total original cost under the previous rules. The IRS has provided little guidance to this issue, but will allow building owners to use any reasonable method that is consistently applied for determining the adjusted depreciable basis of the disposed asset.
The new rules and the related guidance are complex and will require changes in your tax accounting practices, but they also will create some great tax planning opportunities. Contact us if you have any questions about the new rules.