Act Now to Take Advantage of this One Time Tax Opportunity

The IRS released final regulations regarding the tax treatment of expenditures related to tangible property. Under the new regulations, the IRS is granting a one-year “pass” until September 15, 2015 to allow taxpayers to review their 2014 depreciation schedule to retroactively claim a loss for structural repairs or component replacements made in previous years and receive a one-time tax deduction. These new rules are especially important to hoteliers, as the regulations affect every property owner that repairs or improves tangible property.


The new regulations redefine whether an amount spent on tangible property should be capitalized and deducted over a period of years (improvements) or expensed (repairs). Generally, expenditures must be capitalized if they result in a betterment to the unit of property, adapt the unit of property to a new or different use, or result in a restoration of the unit of property.

The new regulations can be applied separately to the building structure and the nine defined “building systems”: HVAC, plumbing systems, electrical systems, escalators, elevators, fire protection and alarm systems, security systems, gas distribution system, and any other system defined in published guidance. Property owners can now expense these major items as repairs (as long as they fall within the IRS’ parameters, that is.) The regulations can be quite favorable to hotel owners.


Under the old rules, when significant building components such as a roof or air conditioner were replaced, taxpayers were required to capitalize and depreciate the cost of the new component over the full depreciable life, typically 39 years. Keep in mind, the original building (which included the cost of the roof) was still being depreciated over its remaining useful life. Basically, taxpayers were depreciating the cost of the old roof and new roof simultaneously. Under the new rules, you can make a partial disposition election to claim a loss on the net value of the replaced component and receive a one-time tax deduction. The new law gives taxpayers the immediate benefit of a large tax deduction in one year, instead of slowly spreading out the benefit over the remaining life of the original asset.

A partial disposition primarily deals with replacements to components of real property. When a major component is replaced, an election can be made to write off a reasonable allocation of the cost of the original asset that was replaced.

Under current regulations, the 2014 tax year is the last tax year for which taxpayers can recognize a benefit by claiming a loss on partial dispositions that occurred prior to 2014.


We applied these regulations to one of our hotel clients. Using the new rules for partial disposition and repairs, we were able to write-off approximately $300,000 in one year, instead of depreciating that amount over the remaining life of the building that was purchased 20 years ago. At an assumed tax rate of 30%, this provided an estimated current year savings of $90,000!


Taxpayers have until September 15, 2015 to apply the new regulations on a retroactive basis. If you have previously replaced or improved a significant component of a building, you may be able to accelerate deductions on your 2014 tax return by making the late partial disposition election.

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