Are You Still Depreciating Non-Existent Assets?

[Julio Gonzalez]

The IRS previously viewed buildings as a single unit of property (UOP). However, the new regulations under IRS Code 1.168(i)-8 allow you as the property owner to utilize a cost segregation study to dispose of smaller UOPs as long as they are properly broken down into individual UOPs within your cost segregation study report.

So what UOPs are you now allowed to depreciate separately?

• HVAC systems
• Gas Distribution Systems
• Plumbing System
• Building Structure (including only windows, walls, doors, roof and concrete)
• Elevators
• Security
• Escalators
• Electrical system

When is a good time to utilize a real estate disposition study?

If you are demolishing a building or renovating it and removing HVAC units, lighting and other components, they are considered to be retired from the building or abandoned. Therefore, the book value of these items can be treated as a business deduction. These items must be identified and valued prior to demolition.

This can be a really great tax strategy to utilize before any renovation and/or demolition is completed. Otherwise you may lose the opportunity for the tax benefit. For example, if you re-light a building, you create the opportunity to take advantage of two tax benefits - the Energy Tax Deductions as well as the real estate disposition study. The Excess lighting can be depreciated much faster than the typical 39 years which allows you to save money and maximize tax strategies. This is just another added benefit of getting a cost segregation study!

Have you considered a real estate asset disposition study? If not, what questions do you have about the study?