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, 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.
Even More Importantly
With additional guidance by the IRS in Revenue Procedure 2015-14, which was issued on January 16, 2015, taxpayers are allowed to look as far back as 1986 to make what are called Late Partial Disposition Election and take the entire write-off on their 2014 tax return. No amended tax returns are required nor do taxpayers have to spread the loss over future tax returns. However, the time is very limited and after the final deadlines for 2014 tax filings, the option of going back as far as 1986 will be permanently closed.
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 Late Partial Dispositions
Determining the costs and identifying the adjusted remaining tax basis in these Ghost Assets will allow the taxpayer significant additional deductions 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 deductions for those building owners that have performed renovations within their buildings over the past 10 years.
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:
An owner of commercial real estate acquired and placed in service a $4 million building and its structural components in 2000. The owner depreciates this building and its structural components as 39-year property. In 2010 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, 2010, 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 Late Partial Disposition Election for the structural components that were physically retired in 2010. An Abandonment Study is performed that documents that the remaining adjusted tax basis of the retired assets was $250,000. The Late Partial Disposition Election allows the owner to expense the entire $250,000 on its 2014 federal income tax return.
For More Information
For more information about how an Abandonment Study can provide the needed analysis and documentation required to implement the Partial Disposition and Late Partial Disposition Elections provided under Revenue Procedure 2015-14, fill out the form at the right.