1. Interpretation and Practical Application
Tangible Property Regulations
Interpretation and Practical Application
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Topics for discussion
Unit of Property
Improvements
Deminimis Safe Harbor
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Unit of Property
Functional Interdependence Test
Building Systems (9 specified in Regs)
How much further breakdown?
How to treat new construction vs acq with multiple buildings
1245 Property
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Example #1 – Apartment Complex:
What should be the unit of property, the complex or the individual building?
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Example #2 – Apartment Building:
What should be the unit of property, the building, the floor, or the individual suite?
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Example #3 – Casino:
What should be the unit of property, the complex or the areas of the building?
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Improvements
Betterment
Ameliorate a Material Condition or Defect Test
Did your client have a plan in place prior to acquisition to address issues?
Material Addition/Increase in Capacity Test
Material Increase in Productivity, Efficiency, Quality or Output Test
General interpretation according to ATG advises to look at the condition of the property immediately after the expenditure to the condition of the property immediately prior to the expenditure.
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Improvements
Adaptation to New Use
Expenditures not consistent with the taxpayer’s ordinary use of the building structure.
Restorations
Replacement of major component
Controversial HVAC example
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Example #4 – Apartment Building:
Acquired completely vacant with plans to renovate immediately. Improvement or Expense? Are there retirements?
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Example #5 – Apartment Building:
Acquired completely leased with plans to renovate as the leases expire over the next 2 years. Improvement or Expense? Are there retirements?
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Example #6 – Apartment Building:
Acquired completely leased with no plans to renovate. Inspector misses structural issues and those must be addressed now. Improvement or Expense? Are there retirements?
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Example #7 – Casino:
Property has been around for decades. Needed a refreshening. Thoughts?
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Example #8 – Casino:
Casino removed the sports book and installed a $1M Poker Room. Adaptation to new use?
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Example #9 – Auto Dealership:
Typical update to GM dealerships. Refreshening or capital improvement?
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Deminimis Safe Harbor
Must have capitalization policy (regardless of having an AFS or not)
Amounts paid for property with an economic useful life of less than 12 months
Amounts paid for property under certain amount per item per invoice
Discussion point – can this be applied to an acquisition with a detailed purchase agreement?
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