New regulations in 2013 and 2014, commonly known as the Tangible Property Regulations or the Repair Regulations, established new rules on what expenses may be immediately deducted and what must be capitalized and depreciated over time. The new regulations provide detailed rules on what types of expenses must be capitalized under Code Section 263(a) as amounts paid out for “new buildings or for permanent improvements or betterments made to increase the value of any property” and for “any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.” The authors provided a brief description of the regulations in their Dec. 24, 2014 article in this column. This article addresses several issues on how owners of real property may use the regulations in practical terms.
Modicum of Clarity
Under the tangible property regulations, expenses that are a ‘restoration,’ ‘betterment,’ or ‘adaptation’ of a ‘unit of property,’ as those terms are defined in the regulations, must be capitalized. Other expenses can be deducted as repairs. The new rules provide a modicum of clarity to an area that had historically been the source of much controversy and litigation. If an expense for a new property is capitalized, the taxpayer may elect to deduct its tax basis in the old property being replaced. This new “partial asset disposition election” concept may provide many real estate taxpayers with additional tax deductions.
