Release of the new Temp Regs. Under 263(a)

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The biggest news that came out over the last month was the long awaited Temporary Regs under 263(a). This clarified the rules related to whether a building expenditure is a capital improvement or can be a repair expense. However, one of the most significant rules that has changed under these Regs is in regards to the disposition of structural components of buildings. In the past, when a taxpayer renovated an existing building, they were not allowed to write off the remaining basis of the structural components being abandoned or “ripped out”. This might include things like the old roof, HVAC units that were replaced, old lighting and so forth.

Under the new rules, you can now assign a value to the old 39 year components that are replaced and write off the remaining tax basis! This is a brand new opportunity that all CPAs should be aware of for all clients. Even though a cost segregation might have already been done on the new renovations, most CPAs did not write off the building components that were gutted or replaced. If a taxpayer made renovations over the last 10 years, you can now use form 3115 to go back and write off the components that were ripped out.

Example:
Client constructs 3 story office building in 2004 for $5M. In 2011 they spend $1M to remodel the 2nd floor (ceilings, walls, lighting, plumbing, ducting, electrical wiring, etc).

Of course you can do a cost segregation study on $1M remodel, but the bigger benefit may be from the retirement of items demolished / abandoned from the original building.

Abandonment Study – Engineer identifies & quantifies an additional $450k (from the original $5M building) of 39 year items that were removed.

Writing off the remaining basis of these structural components yields $375,475k of additional deductions ($450,000 less previous depreciation of $74,525).



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