Magazine article Journal of Property Management

A Call for Depreciation Reform

Magazine article Journal of Property Management

A Call for Depreciation Reform

Article excerpt

The Economic Recovery Tax Act of 1981 created a depreciable life of 15 years for all real property placed in service after December 31, 1980. The depreciable life for property placed in service after March 15, 1984 was extended to 18 years and for property placed in service after May 8, 1985, the depreciable life was extended to 19 years. Depreciation rules changed again upon the enactment of the Tax Reform Act of 1986 when the depreciable lives of non-residential and residential properties changed to 31.5 and 27.5 years, respectively. The 1993 tax act changed the depreciable life of a non-residential property to 39 years for buildings placed in service on or after May 13, 1993.

The extension of the depreciable life to 39 years was intended to be in return for favorable passive loss tax law and other tax law changes in 1993. However, the IRS did not interpret the 1993 law to be favorable to commercial real estate and thereby eliminated almost any benefit to the industry.

The Institute feels the current 39-year time frame does not accurately reflect the useful life of a building and its components. The Institute supports depreciation reform for non-residential and residential real estate that secures a significantly shorter cost recovery period for commercial real estate without adding complexity or creating artificial acceleration of deductions, and specifically:

* Upon recognition of capital gain, taxpayers should be able to use sales costs to first reduce the depreciation recapture portion of the gain;

* Suspended losses should also go to reduce depreciation recapture;

* An installment sale as gain is recognized over a period of time, that a percentage of gain from appreciation and depreciation recapture be used in reporting gain;

* A partially tax deferred exchange, gain from appreciation and depreciation recapture should be reported on an allocated percentage basis. …

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