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Real Estate Accounting Must-Knows of New Tax Law

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Marla Miller

NEW YORK (TheStreet) -- Capitalization tax law -- three words that have little meaning to most people, will become very important to real estate owners this year as the IRS just released the long-awaited changes to tangible property regulations. This new guidance will impact accounting for expenses incurred by real estate companies when an acquisition, remodel or disposition is made.

For almost a decade the new regulations remained in limbo, but on Dec. 23, 2011, they have been made available in temporary form. What does this mean for taxpayers? Despite the regulations' temporary status, property owners making structural changes or acquiring properties after Jan. 1, 2012, will need to be compliant.

Major industries will be heavily impacted by this new guidance. Companies that often revamp and remodel their property spaces -- hotels, restaurants, retail stores -- should be acutely aware of how this new guidance will dictate whether something is deductible or capitalized, meaning the cost that is associated with making a permanent improvement to your property. Knowing if when you replace and reconfigure tables and racks, move lighting fixtures or repair floors is deductible, or not, could result in big tax differences.

This guidance doesn't just affect owners of hotels, restaurants and retail stores. Owners of condominiums, cooperatives and leased properties should read up before knocking down a wall.

What's changed?

  • Change in guidance on when expenditures should be immediately expensed as a repair or capitalized and depreciated over time (expensed allows taxpayers to have a bigger deduction currently that results in lower taxes).
  • Change in dispositions of property for parts of the building -- when you replace a component of a building, such as a roof or HVAC, you can now take a loss on parts of the building being discarded if the replacement is capitalized.
  • Change in "unit of property" definition for buildings -- the guidance on whether to expense as a repair or capitalize is based on the unit of property. The bigger the unit of property, the more likely you are to be able to take an expenditure as a repair. The IRS has made the unit of property for these expense/capitalization rules smaller for buildings, which means more expenditures will now likely have to be capitalized under the new rules.
  • How can you prepare?

  • Assess how compliant your current tax policies and procedures are with these new regulations.
  • Review your current processes and information systems to make certain that necessary information is being captured.
  • Carefully review this new law and know how you will be affected.
  • Complying with the new regulations will likely require many taxpayers to change their current methods of accounting. There are pitfalls and problems that come with almost all change, but also ample opportunity. Having the right procedures in place and ensuring that your accountant is educated on these very comprehensive regulations will maximize your opportunity and minimize your downside risk.

    Marla Miller is a Senior Manager in the Fixed Asset Advisory Services group at BDO USA, LLP. She provides consulting services in the areas of Fixed Asset Reviews and Capital vs. Expense Reviews to both multinational and domestic companies in various industries, including real estate,financial services, retail, hospitality, and manufacturing industries.

    This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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