CREJ - Journal

Page 4

— Property Management Quarterly — May 2015

COLLIERS INTERNATIONAL | DENVER

Property Management Team

Colliers International | Denver’s

Property Management team has a

proven track record of adding value to

commercial real estate assets. Our ap-

proach to property management is unique

to our industry. We have identiied the

subtle drivers that enable us to manage

property at a higher standard and maxi-

mize asset value.

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he Internal Revenue Service

recently issued the final Tan-

gible Property Regulations,

which clarify when build-

ing owners need to capital-

ize expenditures as improvements

and when they can immediately

deduct them as repair expenses.

For real estate owners who under-

stand these new rules, the TPRs are

mostly favorable and allow many to

claim millions of dollars in previ-

ously missed deductions. However,

the TPRs require additional effort to

be in compliance and to optimize

their effect.

The TPRs are all encompassing

and complex, and implementation

requires careful consideration of

each property owner’s facts and cir-

cumstances. Numerous real estate

owners as well as tax profession-

als have struggled with compliance

aspects under the TPRs. In addition,

property owners may need to devise

new accounting procedures to cap-

ture the necessary data to imple-

ment these regulations. Below is a

summary of key facets of the new

tax law.

Partial dispositions.

Prior to the

TPRs, the IRS’s position was that

owners cannot deduct the tax basis

of building components, such as

roofs, heating, ventilating and air-

conditioning equipment or win-

dows that have since been removed.

The new rules allow owners to take

losses on the undepreciated basis

of these components, which can

be very valuable. For the 2014 tax

year only, the IRS allows a simpli-

fied approach to write-off disposed

building components that were

removed prior to 2014. This window

of opportunity is

closed after Sept.

15 (the extended

due date of most

2014 returns).

Review past

expenditures.

The

new regulations

allow owners to

review their fixed

assets for capital-

ized expenditures

that are more

akin to mainte-

nance and repair

expenses and immediately deduct

them. Replacing roofs and HVAC

units often are capitalized but can

be written off immediately, yielding

significant tax savings. Conversely,

owners who were overly aggressive

in immediately deducting capital

expenditures should review prior

year repairs registers as well as

their current year capitalization

policies.

Demolition costs.

Under prior law,

owners were required to capitalize

removal costs into the basis of the

new asset. Now owners immediate-

ly can deduct component removal

costs. This does not apply to demo-

lition of an entire building. Owners

should request that contractors

state removal costs separately on

invoices, and then immediately

deduct such expenditures.

Cost segregations have increased

relevance. Cost segregation studies

have traditionally focused on accel-

erating the timing of deductions

by carving out personal property

and land improvements, which

have favorable tax attributes, from

building costs, which have poor

tax attributes. Under the TPRs, cost

segregations have increased utility

in quantifying the costs of removed

components, such as an old roof or

HVAC components, since taxpayers

are allowed to take losses on them.

Action Needed

Those who manage real estate

portfolios should be reviewing these

regulations with a tax professional

as well as reviewing past expendi-

tures to identify opportunities or

exposure items and current policies

to ensure compliance. For property

owners, managing this effort may

require assistance from a third-par-

ty team that can efficiently handle

the process of gathering, analyz-

ing, documenting and securing any

missed deductions.

There is no easy, one-size-fits-

all way to analyze these rules and

applying them takes careful plan-

ning and implementation to assure

compliance with the regulations.

Consulting with a knowledgeable

tax professional in advance of

incurring major repair, maintenance

or replacement costs is strongly

Taxes

John Frack

Regional director,

KBKG, Pasadena,

Calif.

Retirement of structural components example

Retirements create permanent tax savings example

A taxpayer acquired a $5 million

building in 2009.

• In 2012, he spent $1 million to

remodel portions of the second floor

– ceilings, walls, lighting, plumbing,

ducting, electrical wiring, etc.

• Cost segregation already was

performed in prior years for

the 2009 purchase and the 2012

improvements.

• The retirement study deter-

mines the original cost basis

of demolished components is

$470,000 (from the original $5 mil-

lion building).

• This equates to a loss of

$404,000 in 2014 tax year by filing

Form 3115. (The original cost basis

less depreciation already taken.)

You cannot claim this missed

deduction after 2014. It is the last

chance!

Using the previous example of a

$5 million building with $470,000 of

retirements. If the owner continues

to depreciate the $470,000, he recap-

tures all of it on sale.

• Let’s say $370,000 of that was

39-year and $100,000 was seven-year

property.

• The recapture tax equals $127,500

($370,00 x 25 percent + $100,000 x 35

percent).

If instead, the owner does a retire-

ment study:

• Recapture tax on the $470,000 = 0.

• Capital gain tax = $94,000

($470,000 x 20 percent).

• Permanent tax savings of $33,500

upon sale.