The Retirement of Structural Components and a Repair Regulations study can provide a significant tax savings. We are ready to identify and claim your missed deductions and help you conform to the new Repair Regulations. A summary of the new Repair Regulations rules and a case study from our last webinar:
§Dispositions of MACRS Property
PROPOSED: A building (including its structural components) is the asset for disposition purposes.
• Previously, each structural component was the asset
• Allows taxpayers to forgo a loss without electing General Asset Account treatment
PROPOSED: "Partial Dispositions Election" is needed on timely filed tax return including extensions for year portion of asset is disposed.
• Lookback retirement studies may be limited
TEMPORARY REPAIR REGULATIONS: No election needed. You can retire components for tax anytime.
IRS Guidance on determining basis of disposed components.
• "Study allocating the cost of the asset to its individual components"
• Pro rata allocation based on replacement cost of disposed asset and replacement cost of all assets in the GAA or MAA
• "For assets acquired new - discounting the cost of the replacement asset to its place in service year using the Consumer Price Index."
Example: Taxpayer acquired $5M building in 2007
- 2010 they spent $1M to remodel portion of 2nd floor (ceilings, walls, lighting, plumbing, ducting, electrical wiring, etc.)
- Cost Segregation was already performed in prior year for the 2007 purchase and the 2010 improvements.
- KBKG "Repair Regulations Study " determines the original cost basis of demolished components is $470K (from the original $5M building)
- Recognize a loss of $404K in 2012 tax year by filing Form 3115. (original cost basis less depreciation already taken)
Proposed Repair Regulations limited to dispositions in current tax year.
Permanent Tax Savings!
If you incorrectly continue to depreciate 1245 & 1250 property that was removed from a building, you pay recapture tax upon sale
• 1245 recapture is at ordinary rates (35%-41%);
• 1250 recaptured at 25%
• Capital Gains are typically taxed at 20%
Previous example - $5M building with $470K of retirements.
If they continue to depreciate the $470k, they recapture all of it upon sale
• Let's say $370k of that was 39 year & $100k was 7 year property
• Recapture Tax = $127,500 ($370k X 25% + $100k X 35%)
If they do a Retirement Study
• Recapture tax on the $470K = 0
• Capital gain tax = $94,000 ($470K X 20%)
Permanent tax savings of $33,500 upon sale
Author: Gian Pazzia, CCSP