IRS Activates New Regulations for Tangible Property

It’s tax time again, and trustees and executors involved in portfolios with real estate as well as businesses holding property should be aware of the new regulations linked to tangible property. Although these new regulations are complicated, they can be an important tool for reducing 2014 tax liability with the right planning.

These tangible property regulations, frequently referred to as “repair” regulations, were finalized in September 2013 and were made active for all tax years after January 1, 2014. One of the reasons for the revised regulations is that in the past, taxpayers had to content with IRS codes and Tax Court decisions that often seemed opposed to one another. The new guidelines aim to line up the IRS guidelines with recent decisions from the courtroom to provide clarity for taxpayers. 

The basics of the changes have to do with when real estate owners or businesses spending money to improve, repair, or acquire tangible property. These expenses can be deducted as ordinary and necessary or capitalized and depreciated over time. Especially when it comes to rental real estate, the decision made on how to deduct the expense can have important implications. The most important change in the new regulations has to do with the fact that tangible property regulations require taxpayers to apply them as if they had been in effect from inception, requiring review of general ledgers and depreciation schedules. After analysis, this means either a one-time reduction of taxable income for 2014 or a taxable income increase spread out over four years.