Partial Asset Dispositions
The new tangible property regulations in effect for 2014 and later years mostly frustrate tax accountants, and confuse small businesses and real estate investors. The partial asset disposition election will be available only in the year the asset is replaced or retired.
But in spite of this understandable frustration and confusion, the new regulations provide one noteworthy loophole that property owners, small businesses, real estate investors will need to understand about the partial disposition rules.
Say you have a real estate investment, e.g. a small office building, and you need to replace the roof. Prior regulations had you capitalizing and depreciating the new roof over the usual depreciable life while also depreciating the costs of the old roof which was in a landfill somewhere. With the new rules you can write-off the disposed and undepreciated old roof.
Disposition Election Example
Here is a simple example of how this typically works. Say a small office building was purchased for $390,000 10 years ago and there is need to replace the roof. That would mean that after exactly ten years of depreciation, the taxpayer would have depreciated $100,000 of this amount because $390,000 divided by 39 years equals $10,000 a year. But a building only has one roof. why would you want to continue depreciating the old roof that's not in some landfill?
If the roof needs to be replaced after 10 years, what you will want to do is commission an Asset Disposition Study or a Cost Segregation Study to determine the value of the old roof at the time you purchased the property 10 years ago. The Asset Disposition Study is an analysis of your property that determines the original value of the building components of the property at the time you acquire it. It then accounts for the prior depreciation associated with those building components producing a report of each components book value. In this way you will know the cost of the old roof and the other building components. So, when you replace them you'll know the amount of the deduction.
To keep the math simple, suppose the book value of the old roof is $39,000 of the original $390,000 or ten percent (10%). That would mean that 10% of the accumulated depreciation amounts to $10,000. In this case, you would have a deduction for the old roof of $29,000 ($39,000 - $10,000). Suppose the cost of the new roof is $35,000. With the partial asset disposition the net cost of that new roof was only $6,000. A lot less than you budgeted for.
Who Can Use An Asset Disposition Study
Whenever you have a capital expenditure that results in an improvement to a unit of property, the related project often includes demolishing or removing a portion of the asset being improved. This could be the old roof of a property you purchased, a hotel chain who's acquired a new property and is rebranding the hotel, or the commercial property investor who's just purchased a shopping center or mall and is re-branding or renovating the property. Maybe it's the general contractor or real estate investor who's buying new homes and fixing them and selling or leasing them. Whoever you are, if you're making capital expenditures, Apollo Energies can conduct an Asset Disposition Study on your property to determine what the book value of the unit of property you are replacing or planning to.
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