Depreciation planning for newly acquired commercial real estate.

• Author: Hays, Mary Vidal

Little satisfaction is gained from depreciating commercial real estate over 39 years; however, taxpayers acquiring such property may be able to get a greater tax advantage by depreciating some parts of their purchase over a much shorter period.

Land and Land Improvements A crucial determination in the depreciation of real estate is the allocation of basis to land. Because land is nondepreciable, it is often advantageous to allocate a higher portion of the total purchase price to the building and other depreciable assets. While some practitioners allocate a straight 5% or 10% of cost to land, the regulations set forth specific guidelines on how to make the allocation.

Regs. Sec. 1.167(a)-5 indicates that the basis for depreciation cannot exceed the ratio of the value of the depreciable property at the time of acquisition to the value of the entire property at that time. The burden of proof as to both basis and allocation falls on the taxpayer. Therefore, it would be wise to obtain an independent appraisal of both the value of the land and the allocation between the land and the building.

Certain land improvements are not depreciable; these improvements are considered an extension of the land itself. However, Rev. Rul. 74-265 allowed for depreciation of other land improvements, stating that a useful life may be determined for certain landscaping located immediately adjacent to a building. For example, it was concluded in Eastwood Mall Inc., DC Ohio, 1995, that the land improvements would be destroyed if the depreciable asset (a building, in this case) were replaced or rebuilt. Because any improvements would be lost if the building were repaired, rebuilt or torn down, the improvements were considered closely associated with the building and, therefore, depreciable over the building's life.

Structural Components Regs. Sec. 1.48-1 (e) (2) defines personal property in terms of structural components; if an item is a structural component related to the operation or maintenance of a budding, it is not personal property. Structural components include parts of a building, such as walls, partitions, floors, ceilings, paneling, tiling, windows, doors, cooling and heating system components, plumbing, electrical wiring, lighting fixtures, chimneys, stairs and fire escapes. In addition, swimming pools, paved parking areas, wharves and docks, bridges and fences are structural components (Pegs. Sec. 1.48-1 (c)).

Although the regulations list items as...