The real estate industry has been granted some much needed time by the IRS in applying the new repairs versus capitalization regulations. The IRS has recently issued a notice to taxpayers alerting them that they will amend the temporary regulations to have an effective date of tax years beginning on or after January 1, 2014. The notice also stated that the IRS will be issuing final regulations in 2013.
In December 2011, the IRS issued lengthy and confusing temporary regulations on the repairs versus capitalization of costs on amounts paid to acquire, produce or improve tangible property. These regulations will have a major impact on all taxpayers that own or acquire tangible property, especially those in the real estate industry. The effective date under the temporary regulations was tax years beginning on or after January 1, 2012.
Just as important, the IRS gave taxpayers the option to apply the new regulations for tax years beginning on or after January 1, 2012. There may be a good argument for a taxpayer to adopt the new regulations early if your property has gone through extensive renovations or you are still depreciating structural components that have been removed. A taxpayer may recognize a substantial current tax benefit in these situations. A cost segregation study can also help to enhance this. Either way, the decision to adopt early should be studied carefully. There is still some uncertainty as to the changes that will be made in the final regulations. Other tax factors such as changes in tax rates and the new Medicare tax need to be taken into account also.
The added time will provide the real estate industry with the ability to understand and implement these new rules, while still allowing others to take advantage of them now. The way taxpayers internally account for repairs and improvements to their properties will need to change to meet the requirements of the new regulations. Real estate industry professionals should be considering the impacts on their planning and their accounting records right now so they can transition smoothly into the new rules.
Please contact a DGC representative to discuss how your real estate investment can transition into, benefit from, and comply with the new rules.