Partial Disposition on Property NOT In-Service, Yet???

2 Replies

Here’s the scoop…I have a CPA, but he didn't provide me the answer I wanted and/or think is logical when it comes to the topic of claiming "Partial Disposition", so I wanted to put it out to y'all.  I'm a business owner in Massachusetts currently leasing space for my business to function.  I acquired a 1-story office building early-2018 (that was occupancy-ready at the time of purchase) and am currently in the process of selectively demolishing 25% (non-structural) of the interior to make way for $700K of renovations (still to be used as an office building).  All demolition will be completed by end of 2018, but the renovation project won’t be completed until mid-2019 (official in-service date).  My intention was to hire a 3rd-Party Cost Seg Firm to perform a ‘Partial Disposition Study’ to claim the unadjusted basis still left in the 25% of demolished assets in 2018 (estimated to be ~$340K).  BUT, my CPA is telling me that in order to claim partial disposition deductions on my newly acquired office building, I needed to place it "in-service" PRIOR to disposing of any assets because per the Partial Disposition rules (listed within the final Tangible Property Repair Reg's released in 2014), assets must be used in a trade or business or rental activity to be claimed.  If those are the rules, then those are the rules and I will concede...however, I would have to imagine that a good majority of people perform their renovations directly after acquisition to take advantage of the building being empty and not having to deal with construction in a live/working environment...logical, right...so because I didn't place my newly acquired building in-service prior to demolition/renovations I don't get to claim ~$340K of Partial Disposition deductions???  This is asinine...so now to "play the game", I should have used my newly acquired office building for my business's "quasi-storage facility" or better yet moved only "my office" into the newly acquired building just to claim it's been placed IN-SERVICE?!  There's got to be a way to claim these partial dispositions even though my building has not yet been placed in-service...help???

@Jack Judge It may not be what you want to hear, but your CPA is right. If the property is vacant, it is not yet been "Placed in Service", and you cannot claim partial disposition, as far as depreciation is concerned. Depreciation begins when you place the property in service, either by occupying it yourself, or renting it out.

You may be able to take advantage of a certain amount of De Minimis Safe Harbor write offs if they comply with the guidelines. I guess that may require another conversation with your CPA.

Yonah...much appreciated for the confirmation...although frustrating to read.  Let me ask you this...IF I had placed the building in-service via short-term lease (5-months) to another business needing space while I pulled together final design plans for my renovations, would I have been able to make the Partial Disposition election for 2018?

And the follow-up question to my question above (assuming your answer is "Yes.") is...would the ~$340K of partial disposition losses be counted as "ordinary" (or) "capital" losses??