Academic journal article Journal of Accountancy

Tax Court Disallows Cost Segregation of Apartment Building Components

Academic journal article Journal of Accountancy

Tax Court Disallows Cost Segregation of Apartment Building Components

Article excerpt

In a case exploring the extent of allowable cost segregation in depreciable rental real estate, the Tax Court held that all but a small handful of items identified by the building's owner had to be depreciated over the life of the building.

AmeriSouth, a limited partnership, bought an apartment complex in 2003 for $10.25 million. AmeriSouth commissioned a cost-segregation study and then attempted to depreciate more than 1,000 building components over five- or 15-year spans, instead of the 27.5 years applicable to rental real estate under the modified accelerated cost recovery system. Using its cost-segregation method, AmeriSouth deducted $3,029,029 for depreciation in the years 2003-2005.

The IRS audited the partnership and disagreed with AmeriSouth's treatment of the components; it denied $1,079,751 in deductions for those years. The case ended up in Tax Court, where the IRS also argued that AmeriSouth was attempting to depreciate some assets it did not own.

About the time the case was tried, AmeriSouth sold the apartment complex and subsequently stopped responding to communications from the court, the IRS, and even its own attorneys. …

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