2C — September 2023 — Owners, Developers & Managers — M id A tlantic Real Estate Journal
www.marej.com
O wners , D evelopers & M anagers
By Lindsey Ottum, Withum The Basics of Partial Asset Dispositions
B ack in 2013, the IRS released the final tan - gible property regula-
partial asset disposition elec- tion that allows and some- times requires that a taxpayer partially dispose of a MACRS asset(post-1986) and report the gain, loss, or other deduc- tion in the year of the disposi- tion. MACRS stands for modi- fied accelerated cost recovery system and is the depreciation system that is currently used in the United States for real and personal property. Ac- cording to regulation section § 1.168(i)-8, if any of the following situations has occurred, a tax- payer is required to recognize a partial disposition: • Sale of a portion of a MACRS asset
• Involuntary conversion of a portion of a MACRS asset • Like-kind exchange of a portion of a MACRS asset The good news is that this election most often results in a loss, and it is reported on Form 4797. This election is most commonly used for buildings, making it a common occur- rence within the real estate industry. The facts and circumstances of each situation must be ex- amined in order to determine the asset portion disposed of.The structural components of a building, including build- ings that contain multiple units, and are original to the
building, are all considered to be one asset. After the original building is placed in service, any additional work, such as improvements or additions to the building, are considered to be separate assets. The first step is determining if the improvement work being done is significant to the unit of property. If so, a portion of the original building can be disposed of once the new asset is placed in service. The next step is to deter- mine the adjusted basis of the asset being disposed of. This requires the unadjusted basis of the entire asset, which is typically its original cost, but
if the original cost is unknown, it can be determined by using any of the following methods: • Cost-segregation study • Using the producer price index (PPI) • Pro rata allocation of the unadjusted depreciable basis based on the replacement cost of the disposed portion of the asset and the replacement cost of the asset The unadjusted basis is then decreased by the greater of the depreciation allowed or allow- able, resulting in the adjusted basis, which is the net book value of the portion of the origi- nal asset being disposed. There will now be two assets on the taxpayer’s books: the asset por- tion being disposed of and the asset portion remaining. An example is as follows: Taxpayer purchases a property and places it in service. The purchase price of the asset is allocated between land and building, and no further de- lineation is done because the taxpayer did not elect to have a cost segregation study prepared to further allocate the assets. Three years later, the taxpayer replaces the entire roof, includ- ing shingles, sheathing, etc. This asset is required to be capitalized under the tangible property regulations. However, when the cost of the new roof is placed on the books, there are technically two of the same assets now on the books. The taxpayer should implement “the rule of one”, meaning that there should only be one roof on the books. Therefore, a partial asset disposition of the origi- nal building’s purchase price should be calculated using the producer price index, and a loss recorded. At this point, only one roof will remain on the books. There may be many different situations in which a partial disposition can be beneficial or is required. When questioning whether this election applies to you, keep note of any restora- tion-related work. Examples of potentially capitalizable work include replacing an HVAC, repairing a roof, resurfacing a parking lot, replacing lighting, doors, or windows, and other renovations. Please consult with your tax adviser for more information regarding your specific situation and to find out more information about how you can take advantage of this election. Lindsey Ottum is a Tax Su- pervisor in the Real Estate Industry at Withum. MAREJ
tions, which p r o v i d e d guidance on the applica- tion of 162(a) and 263(a) of the Inter- nal Revenue Code. These regulations
Lindsey Ottum
apply to any corporation, S cor- poration, partnership, LLC or individual who files a Sched - ule C, E or F and acquires, produces or improves tangible real or personal property. The regulations include a
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