What Real Estate Investors Need to Know about the New Depreciation Regulations

In this third installment, we take a look at how the new regs restate, in a more comprehensive way, the long-established concepts about which costs must be capitalized in connection with the acquisition or production of real or personal property.

Acquisition and Facilitative Costs
In general, amounts paid to acquire or produce a unit of real or personal property must be capitalized. Amounts paid to acquire or produce property include the invoice price, transaction costs and facilitative costs. Facilitative costs – i.e., amounts paid in the process of investigating or otherwise pursuing the acquisition – must be included in the basis of the property acquired or produced.

Facilitative costs include “inherently facilitative” expenses and are made up of eleven categories:

Shipping Engineering fees
Moving or appraising property Environmental or inspection services
Application fees Brokers’ fees
Sales/transfer taxes Appraisers’ fees
Finder’s fees Qualified intermediary fees (like-kind exchange)
Architectural fees

Real Estate Purchases
Costs relating to activities performed in the process of determining whether to acquire real property and which real property to acquire generally are not facilitative expenses and therefore may be currently deductible. For example, a retailer wouldn’t have to capitalize the cost of hiring a consulting firm to suggest which areas of the city it should expand into (these costs are not on the “inherently facilitative” list), but it would have to capitalize the cost of paying an appraiser to determine the value of the properties the consulting firm recommends (appraisal fees are on the “inherently facilitative” list).

Work Performed Prior to “placed-in-service” Date
In addition to capitalizing amounts paid to acquire or produce a unit of property, the taxpayer also must capitalize costs for work performed before the date that unit of property is placed in service. This rule for work performed before the placed-in-service date can transform what would normally be currently deductible repair expenses into capitalized expenses.

For example: In 2012, Ace Corp buys a building for use as a business office. Before placing the building in service, Ace incurs costs to repair cement steps, refinish wood floors, patch holes in walls, and paint the building interior and exterior. In 2013, Ace places the building in service and begins using it as its business office. None of the work was an improvement to the building or its structural components. Nevertheless, the amounts paid must be capitalized as costs of acquiring the building because they were for work performed before Ace placed the building in service.

As with many of items in these new rules, taxpayers have the option to expense the acquisition costs of assets that otherwise would have to be capitalized under the De Minimis Rule.