The New Repair Regs and Real Estate

The IRS issued temporary regulations, known as “repair regulations,” in December 2011 in an attempt to clarify the treatment of expenditures in purchasing, producing or improving tangible assets. The temporary regulations expand and clarify standards previously found in regulations under S. 162(a) and 263(a). Importantly, the regulations provide rules to determine whether certain expenditures are deductible repairs or capital improvements. Whether the temporary regulations assuage the perennial confusion remains to be seen and taxpayers should expect two revenue procedures in the near future expounding further on the matter. 

In the context of real estate, the temporary regulations treat a building as a single Unit of Property (UOP) comprised of the building, its structural components and “building systems,” a new term appearing in these regulations. Building systems encompass: 

  •  HVAC, 
  • plumbing, 
  • electrical,
  • escalators, 
  • elevators, 
  • fire protection and alarm systems, 
  • security systems; 
  • gas distribution systems; and s
  • structural components identified in published IRS guidance not part of the building structure.

Hence, any expenditures associated with a building system is now likelier to require capitalization as a building is now a single UOP.

A fact-intensive analysis, the regulations define Improvements as: 

  • betterment to a UOP, 
  • adaptation for different or new use, and 
  •  restoration.

Fortunately, a safe harbor exists for “routine” maintenance which includes inspections, cleaning, etc. The determination of what constitutes “routine” is also a fact intensive analysis dependent on the taxpayer’s business. Further, leasehold improvements must continue to be capitalized and the term of the lease has no bearing in terms of cost recovery. EisnerAmper will continue to monitor for additional official guidance released by the IRS.

Aninda Dhar is a Senior Tax Manager with extensive experience in federal and international tax matters. Aninda provides tax consulting services to entities in numerous industries and serves a diverse roster of clients.

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