On March 12, the Tax Court issued an opinion challenging what many of us
thought was a well-settled strategy for maximizing depreciation deductions for
rental real estate. It's unclear what effect this decision will have in the
long run, but we want to let you know that we're paying attention to help
protect your tax breaks on your properties.
"Depreciation" is the process of deducting your investment in assets like real estate over a period of time intended to reflect its useful life. A "cost segregation study" is the process of dividing a property between structural components such as windows and roofs (which depreciate over 27.5 or 39 years) and personal property such as carpeting and appliances (which depreciate over five, seven, or 15 years). Depreciating those components faster gives you bigger deductions in the first few years of ownership.
In the recent AmeriSouth decision, the Tax Court sided with the IRS and refused to let an apartment owner accelerate a number of deductions, including site preparation and earthwork, the water distribution system, sanitary sewer, gas line, special plumbing and electric, HVAC, finish carpentry, mill work, interior windows and mirrors, and special painting. But while this sounds like yet another blow for the taxpayer, there's a twist. The owner actually sold the property before the case came to trial, and even stopped defending their position in court.
The AmeriSouth decision may just wind up being another example of bad cases making bad law. It's unclear what the Court might have ruled if the owner had actually put up a fight. It's also worth noting that if the decision does set new policy, it won't actually eliminate any deductions. Rather, it will merely slow them down. You can be sure we'll keep a close eye on developments as they arise, and we'll keep you posted.
"Depreciation" is the process of deducting your investment in assets like real estate over a period of time intended to reflect its useful life. A "cost segregation study" is the process of dividing a property between structural components such as windows and roofs (which depreciate over 27.5 or 39 years) and personal property such as carpeting and appliances (which depreciate over five, seven, or 15 years). Depreciating those components faster gives you bigger deductions in the first few years of ownership.
In the recent AmeriSouth decision, the Tax Court sided with the IRS and refused to let an apartment owner accelerate a number of deductions, including site preparation and earthwork, the water distribution system, sanitary sewer, gas line, special plumbing and electric, HVAC, finish carpentry, mill work, interior windows and mirrors, and special painting. But while this sounds like yet another blow for the taxpayer, there's a twist. The owner actually sold the property before the case came to trial, and even stopped defending their position in court.
The AmeriSouth decision may just wind up being another example of bad cases making bad law. It's unclear what the Court might have ruled if the owner had actually put up a fight. It's also worth noting that if the decision does set new policy, it won't actually eliminate any deductions. Rather, it will merely slow them down. You can be sure we'll keep a close eye on developments as they arise, and we'll keep you posted.
