A PAD allows a building owner to write down the remaining depreciable basis of items removed during a renovation, as well as the costs for the removal and disposal of those items. Your clients who own commercial property can receive a tax deduction in the current year, but it is a “use it or lose it” opportunity. Failure to write down the remaining basis in the tax year the renovation was performed will permanently negate the opportunity. A partial asset disposition will also yield a permanent tax savings at the time of sale by reducing the building basis.
Many tax professionals have clients who should consider this opportunity. Who should be implementing annual partial asset dispositions:
- Retail lessors with tenants leaving assets behind
- Property owners with replacements, renovations, and improvements to facilities in excess of $50K in following example areas:
- Roof Repairs
- Replacing Lighting
- Resurfacing Parking Lots
- Replacing Doors and Windows
- Resurfacing Interior or External Floors
- Painting (Interior or Exterior)
- Replacement of HVAC
- Tenant space configurations or allocations
- Common area renovations
- Property owners who may have demolished and improved facilities with costs in excess of $50K
- Property owners who have purchased facilities or built facilities or expanded facilities since 2000
- Businesses that have replaced, improved, or refurbished major components of operating equipment in the current tax year
- Businesses operated as pass-through entities that may be contemplating a sale in the next year or two, and where there may be substantial appreciation in the facilities or operating assets to be sold
The final tangible property regulations (263a) provide detailed guidance on the disposition of these assets. Taxpayers are highly encouraged to make an annual election to take these additional write offs as they improve tangible property.
The implementation of an engineering-based cost study will provide you, the tax professional, with accurate, defendable calculations to apply to your client’s tax return.