How to preserve commercial property owners’ depreciation tax deductions.
Planning is key in all aspects of construction, and no less so in tax planning. If your commercial real estate client is planning a rehabilitation or major maintenance project on a building, careful planning can help preserve valuable depreciation deductions.
While the final tangible property regulations allow building owners to write off the remaining adjusted basis of retired building structural components, the final revenue procedure made clear that the rules of IRC Section 280B on demolition costs still apply. Under 280B, the remaining tax basis of a demolished building is added to the basis of non-depreciable land. However, a safe-harbor rule allows the building to continue to be depreciated if 75% or more of the external walls of the building remain in place as internal or external walls and 75% or more of the existing internal structural framework of the building remains in place. Therefore, once demolition removes 25% of the external walls and internal structural framework, the safe harbor no longer applies. When that happens, the client loses all future depreciation deductions related to the remaining basis of the building.
Tax Planning when 280B could apply
With some up-front planning, you can help your client save those depreciation deductions. Here’s how it works:
Your client acquires a building for use in an active trade or business activity. Your client may decide to substantially renovate or completely demolish the building in a future year whereby IRC 280B would apply.
In the year of acquisition, you engage CSP360 to perform a cost segregation study to properly classify assets as real or tangible personal property and accelerate depreciation deductions. In the same tax year, you make general asset account (GAA) elections for each class of assets based on the cost segregation study.
Under the tangible property regulations, the disposition of assets within a GAA are not recognized unless the taxpayer elects to do so. Therefore IRC 280B doesn’t apply because a disposition isn’t recognized for tax purposes. Your client can continue to depreciate the demolished building without having to capitalize the remaining tax basis to non-depreciable land. In effect, your client will be able to depreciate two buildings: the old building that was demolished and the new building that was constructed. A cost segregation study should be performed on the new building as well.
Are You Consulting with the Right Professionals?
This is one example where consulting with the right professionals can achieve substantial tax deductions for commercial building owners that you might otherwise miss. Do you have the right team in place that can provide this type of engineering, tax and accounting expertise?
Contact CSP360 to learn how our team of tax specialists, engineering professionals and accounting method specialists can help you identify and preserve depreciation deductions for commercial building owners.