One of the largest changes to tax code since 1986 was passed in 2015, and these changes directly affect real estate owners and investors. These regulations are extremely taxpayer-friendly, but most owners and investors are not aware of them. They are called the Tangible Property Regulations (TPRs), under code section 263a (1-3). The regulations put all the past court cases and past regulations into one single code that also contains a few interesting twists.
Tangible Property Regulations Expenditures and Repairs
The TPRs clarify which expenditures and repairs on buildings can be written down and which must be depreciated over 39 or 27.5 years. It is very advantageous for the building owner or investor to write down as many repairs as possible. This is because they not only receive a one-time expense of the entire expenditure but will also have reduced capital gains upon the sale of the building.
Generally, they are as follows:
The expenditure (or renovation) can be expensed if it meets these criteria:
- Done more than two years after purchase
- Did not make the component being repaired or replaced materially better
- Affected less than 33 percent of all the like components
There are also three Safe Harbors which allow certain expenditures to be expensed without IRS scrutiny.
- The De Minimis Safe Harbor is for expenditures under $2,500.
- The Small Taxpayer Safe Harbor covers many expenditures on buildings with a purchase price of under $1 million.
- Routine Maintenance Safe Harbor is for expenditures to keep the building in its normal operating condition, which will also have to be repeated at least once in the subsequent ten years.
The amazing opportunity is under code section 481A. If past expenditures (not De Minimis or Small Taxpayer), which are currently being depreciated, would not be depreciated today (based on the regulations), they can be expensed in the current year.
So, the regulations will positively affect the building owner or investor moving forward but, in addition, can create a permanent tax deduction right now.
Authored by: Kevin Jerry