New Repair Regs

[Terry D EA]

I guess I opened my mouth too soon in the other post with this topic. Just had a client who we missed last year come in with two rental properties purchased in 2012. Their preparer made a few mistakes with the depreciation in my opinion. In the preparer's defense, they did a good job with what they had to work with. This client is not difficult but is elderly and sometimes doesn't fully understand what you are asking for.  Replacing a heating unit... not a capital improvement but depreciated for 27.5 years. There were capital improvements not added to capital but depreciated for 27.5 years separately. A five figure renovation that was not added to capital but depreciated separately. Acquisition costs were depreciated for 27.5 years and did not include the legal fees for acquisition in capital and survey fees expenses and not capitalized. So it looks like form 3115 here we come for this one. Not exactly the way I wanted to start the season off. But here goes.

[joanmcq]

I don't understand what you mean by capital improvements not added to capital, but depreciated separately? Do you mean a separate line of the dep schedule?.

[Terry D EA]

Yes a separate line on the schedule. The bottom line comes out the same but I normally put add all capital expenditures to the depreciable basis of the rental property.

[Lee B]

I guess I opened my mouth too soon in the other post with this topic. Just had a client who we missed last year come in with two rental properties purchased in 2012. Their preparer made a few mistakes with the depreciation in my opinion. In the preparer's defense, they did a good job with what they had to work with. This client is not difficult but is elderly and sometimes doesn't fully understand what you are asking for.  Replacing a heating unit... not a capital improvement but depreciated for 27.5 years. There were capital improvements not added to capital but depreciated for 27.5 years separately. A five figure renovation that was not added to capital but depreciated separately. Acquisition costs were depreciated for 27.5 years and did not include the legal fees for acquisition in capital and survey fees expenses and not capitalized. So it looks like form 3115 here we come for this one. Not exactly the way I wanted to start the season off. But here goes.

This is kind of like a stream of consciousness tax question. Not even sure what say.

[joanmcq]

I use another line, unless all the improvements were done before placing it in service. If the improvements are a different UoP, like replacing all the wiring, then I think I'll always use a separate line.

[Terry D EA]

I agree with you Joan and do use another line but this is the first year when the property was placed and put in service. I guess maybe I wasn't clear on that in the original post. I know I do have to change some things. One example is a replacing a garage door because the other one had gone bad really doesn't increase the property value and in my opinion is a repair. Should it have a life of 27.5 years? Is a toilet by itself without any other bathroom renovations a capital improvement? I'm not kidding here there is depreciation for 27.5 years for a toilet. I would have just expensed that thing as a repair.

[mcb39]

Thanks for the explanation Terry.  I, too, wondered why you would add those things to the basis of the building.  I agree on the replacements of the garage door and the toilet. 

[kcjenkins]

I agree also.  And on a new purchase, I would have combined all the acquisition costs to bring it into usable condition into at most 3 lines.  

[Lee B]

For improvement purposes the new Regs identify the following separate units of property for buildings:

 

1. Building Structure ( Exterior Walls, Roof, Windows, Doors etc)

2.  HVAC

3.  Plumbing

4.  Electrical

5.  Escalators

6.  Elevators

7.  Fire Protection & Alarm Systems

8.  Security Systems

9.  Gas Distribution Systems

10. Other Systems

 

Risk:  Taxpayer may have expensed in past years as repairs expenditures to any of these identified systems

           which under the new Regs would require capitalization. In which case it may be necessary to execute

           a Change in  Accounting Method with a positive 481 (a) adjustment spread over 4 years

 

Reward:  Conversely Taxpayer may have capitalized in past years expenditures to any of these systems

                which under the new Regs would require expensing in  which it may be necessary to execute

                 a Change in Accounting Method with a negative 481 (a) deductible in the current year.

 

Opportunity:  The ability to make a partial disposition election and recognize a loss on for example:

                      the disposition of an elevator which was replaced.

 

Went to a class on Monday which covered this in depth. Posting here helps me remember what I learned.

 

Lee Barckert

[mcb39]

Thanks Lee............I just printed that.