Is There a Hidden Tax Deduction in your Building?

The IRS recently issued new tangible property regulations. The “Repair Regs” are effective beginning in 2014, however taxpayers are allowed to early adopt all or some of the various sections.  This is a big topic within the real estate industry and it is quite possible that you have already heard about the many provisions.  One provision in particular could provide a very large deduction for building owners on their 2012 or 2013 tax return.

Taxpayers now have the ability to recognize a gain or loss on dispositions of structural components of a building. For example, assume a building owner bought a building 15 years ago and then 10 years later replaced the roof. Under current rules, the building owner would have capitalized the new roof over 39 years (assuming a commercial building). In addition, they would still continue depreciating the cost of the old roof that was hidden in the original building asset.  The rules did not allow component depreciation for structural components of the building, so you could not carve out that old roof from the rest of the building.

The new tangible property regulations will allow the taxpayer to dispose of structural components that are no longer in service and, in many cases, recognize a loss upon the disposition.  More importantly, they allow you to “catch up.”  So, in the example above, the building owner could write off the apportioned cost of that old roof that was replaced 5 years ago and take a deduction for the remaining undepreciated cost of the old roof on their 2012 tax return.  This scenario would apply to any structural component which you have replaced over the years but whose original cost remains on the books, i.e. doors, windows, partitions, HVAC, walls, etc.

The challenge for property owners and tax professionals is how to determine the value, or cost basis, of the disposed property.  Fortunately, the regulations provide for a fairly simple approach provided it meets their guidelines. There are a couple of different ways to approach valuing structural components.  The best, of course, is a cost segregation study and while it is the most expensive approach, it is not the only approach.  The IRS only requires that the method you use be reasonable and consistent.

Taking advantage of this new provision requires a change in accounting method which entails additional filings to accompany your income tax return. We can help you through the process, whether it is determining the value of the old asset either through a cost segregation study or another accepted approach, filing the necessary forms for a change in accounting method, or making additional recommendations, including avoiding traps related to the new rules that are mandatory beginning in 2014 .  We can also give you a preliminary assessment of your tax savings before we do anything.

For more information or specific questions, please contact a KatzAbosch advisor at 410-828-CPAS (2727) or email

Submitted by Stephen M. Bishop, CPA

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