Temporary regulations create new applications for cost-segregation studies.

• Author: Wheeler, Josh N.

Treasury published temporary regulations (T.D. 9564) on Dec. 23, 2011, that affect all taxpayers who acquire, produce, or improve tangible property. The temporary regulations represent almost eight years of effort to clarify the rules surrounding capital expenditures under Sec. 263(a).

The temporary regulations cover topics particularly relevant to real property owners, such as the definition of a building as a unit of property, building improvements, dispositions of building structural components, and special rules for leased property, condominiums, cooperatives, and leasehold improvements. Real property owners should consider the tax accounting options available in the regulations and how cost-segregation studies can ease compliance requirements. Historically, cost-segregation studies primarily focused on identifying and segregating personal property or land improvement assets embedded in the cost of real property assets. As taxpayers adopt the new regulations, some will find it beneficial to apply the information in these studies to future improvements and dispositions of their building structures.

Building Improvements and Repairs

The first opportunity the temporary regulations create for cost-segregation professionals and their clients springs from the capital improvement guidelines. Under Temp. Regs. Sec. 1.263(a)-3T(d), an improvement is an expenditure that betters a unit of property, restores a unit of property, or adapts a unit of property to a new or different use. Sec. 263(a) requires capitalization of improvements to tangible units of property. The temporary regulations expand the application of capital improvement guidelines to specific building systems in addition to building structures.

According to Temp. Regs. Sec. 1.263(a)-3T(e)(2)(ii), the building as a unit of property consists of the building structure and its enumerated building systems including: (1) heating, ventilation, and air conditioning (HVAC) systems; (2) plumbing systems; (3) electrical systems; (4) all escalators; (5) all elevators; (6) fire protection and alarm systems; (7) security systems; (8) gas distribution systems; and (9) other structural components identified in published guidance. Cost-segregation providers should work closely with their clients to determine whether further subdivision of the building into its functional systems would be beneficial. The potential benefits to the taxpayer are clear: A cost-segregation study enhanced with additional...