IRS Guidance
on Tangible Property Regulations

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December 31st Deadline

Alissa Adler, Principal

The long awaited final guidance for tangible property regulations was released by the Internal Revenue Service on September 18, 2014 in what is called Rev. Proc. 2014-54. This is important to owners of real estate because it represents the procedures necessary to comply with the prior regulation, released on September 13, 2013, regarding rules related to the acquisition, production, and improvement of tangible property.

In layperson’s terms, in the past, if a property owner replaced a major building system such as the roof, or any smaller component such as an HVAC rooftop unit, the owner was required continue to depreciate the old item as well as the replacement item. This new IRS ruling gives the owner the option to make what is called a ‘partial disposition election’ in the year of replacement. This means that the undepreciated cost basis of the old item can be written off as long as the cost of the new item is capitalized.

Of course, there is always a catch. The partial disposition election is only being made available for tax years beginning January 1, 2012 and beginning before January 1, 2015. In other words, any accounting method change request must be made on the 2014 tax return. In addition, this issuance affects some calculation methods for partial disposition elections made in 2012 and 2013 as well as some accounting methods in Rev. Proc. 2014-17.

Podolsky|Circle is not a tax accounting firm, nor do we give accounting advice, so we highly recommend that you seek guidance from an expert on this topic. It isn’t often that real estate owners get these windows of opportunity – so while the window is open, run, don’t walk, to your trusted advisor.

KEY POINTS:

  • Long wait is over: The IRS spent ten years revising rules to give guidance on whether expenditures are capital improvements or ordinary repairs, and how they can be depreciated.
  • Partial disposition: Taking the partial disposition election may be beneficial for owners continuing to depreciate replaced building components.
  • Short window is open: December 31, 2014 is the deadline to take advantage, so consult your tax advisor as soon as possible.