This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

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.

    Check Out Our Best Services for Investors

    Action Alerts PLUS

    Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    Quant Ratings

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    Stocks Under $10

    David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    14-Days Free
    Only $9.95
    14-Days Free
    Dividend Stock Advisor

    David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Updates with exact steps to take - BUY, HOLD, SELL
    Trifecta Stocks

    Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

    Product Features:
    • Model Portfolio
    • Intra Day Trade alerts
    • Access to Quant Ratings
    Real Money

    More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

    Product Features:
    • Access to Jim Cramer's daily blog
    • Intraday commentary and news
    • Real-time trading forums
    Only $49.95
    14-Days Free
    14-Days Free
    AAPL $94.19 -1.04%
    FB $118.06 0.54%
    GOOG $695.70 0.48%
    TSLA $222.56 -4.20%
    YHOO $36.00 -0.03%


    Chart of I:DJI
    DOW 17,651.26 -99.65 -0.56%
    S&P 500 2,051.12 -12.25 -0.59%
    NASDAQ 4,725.6390 -37.5850 -0.79%

    Free Reports

    Top Rated Stocks Top Rated Funds Top Rated ETFs