Since the IRS released the final tangible property repair regulations, many commercial real estate and other businesses have been seeking to take advantage of key tax saving opportunities. Specifically, a key feature of the final regulations is that a taxpayer can claim an immediate loss on an asset disposition. Known as a partial asset disposition election, taxpayer can claim an immediate loss which results in a current year tax savings. The disposition election permits the taxpayer to recognize the loss on the disposition of a structural component of a building or a portion of a structural component (for example a building’s roof). To help clients, prospects and others understand the election; JLK Rosenberger has provided a brief summary below.
Partial Disposition Election Summary
As part of the new final tangible property repair regulations, the IRS now permits commercial real estate owners to make a partial disposition election. This means that a commercial property owner can make a disposition election when they replace the roof to the building. This is important because it allows the taxpayer to identify a portion of the asset (roof) even though the building is the asset for depreciation purposes. The election permits taxpayers to claim a loss on the disposed portion of the roof rather than depreciating both the old and new roof on the company’s books. What makes the election more attractive for taxpayers is that they can recognize the loss in the tax year it was incurred. This is in stark contrast to the prior regulations which required the asset be depreciated over the standard 39 year timeline. The bottom line – the tax benefit is realized almost immediately.
Disposition Election Example
Here is a simple example of how this typically works. Say a small office building was purchased for $390,000 and there is need to replace the roof. That would mean that after exactly ten years of depreciation, the taxpayer would have depreciated $100,000 of this amount because $390,000 divided by 39 years equals $10,000 a year.
If the roof needs to be replaced at that point, what the taxpayer can do is break the $390,000 of original cost and the $100,000 of accumulated depreciation into two smaller “sub-assets”: the roof and the building without the roof. And then the taxpayer can write off the remaining undepreciated portion of the roof. To keep the math very simple, suppose that the roof represents $39,000 of the original $390,000 or ten percent. That would mean that ten percent of the accumulated depreciation amounts to $10,000.And in this case, partial disposition treatment means the taxpayer shows on his or her tax return an asset that originally cost $39,000 and which had accumulated $10,000 of depreciation being disposed of for a $29,000 loss.
The good news is that the election is not available only to building owners; Landlords that renovate space for a tenant are also eligible to make the election. To the extent the portions of leased space are renovated, removed or otherwise significantly changes, the landlord can write off the remaining basis of the disposed asserts. This is much more favorable than prior regulations which allowed the landlord to take a loss once a lease was terminated, but not before. Again the immediate tax savings is quite attractive for many. In most cases a partial asset disposition is elective, but the IRS has deemed that under certain circumstances that it can be mandatory. This includes disposition from a casually event such a hurricane, tornado, fire or other such event. It is also required in the case of a like-kind exchange.
The partial asset disposition election is a powerful tax savings tool for qualifying property owners and landlords. While rules governing when it can be used may be complex, the bottom line savings is easy to understand! For this reason, it’s essential to understand how it works to determine if your company can take advantage of the benefit. For additional information on the partial asset disposition election and potential savings for your company, JLK Rosenberger wants to help! For additional information please contact us at 949-860-9902, or click here to contact us. We look forward to speaking with you soon.