Building Systems-Component Depreciable Life

[Sabre]

Somehow I was under the impression that if my clients could allocate the purchase price of a commercial building(that they already owned) to the 9 building systems as outlined in reg. 1.263 that these components could be depreciated faster than 39 years but I can find no guidelines as to the depreciable lives of these systems(HVAC,Plumbing,Electrical,etc.)

I had planned on doing a 481(a) adjustment and pick up the increased depreciation on the form 3115.

Please correct my thinking because since I can find no chart of depreciable live for these components I must be wrong.

Help!!!

[TXEA]

The Building Systems components are primarily related to what must be done when a building system component is repaired or replaced. The TPR's did not change the depreciable life of the building systems.

The building is a unit of property with the building systems as 9 different separate units of property. Thus, the BAR standard applies to each of these separate units of property (as opposed to the building as a whole).

For example, if the HVAC system is replaced (a 39 or 27.5 year asset) then the new is depreciated and the old can be disposed of (loss taken on adjusted basis) on Form 4797.

The reason for the delineation of the building systems is that some in the past might have expenses the purchase of a new HVAC as a repair. Now, with the building systems as a separate unit of property, the replacement of such is a capital improvement (39 year or 27.5 year) and a loss is taken on the removed system.

Further, the Routine Maintenance Safe Harbor can be applied to each of the building systems.

As another example, one might consider the plumbing systems (which I assume includes the hot water heater). Could it be argued that the hot water heater is a small component of the separate unit of property defined as plumbing systems? For a residential rental, the plumbing system might cost $15 - $20 thousand dollars (depending on size of home). The plumbing system does not function independently of the hot water heater (in other words, the hot water heater is critical to the plumbing system) and replacement of a small portion of the plumbing system MIGHT constitute a repair. I don't know this as there seems to be little guidance other than in the form of various percentage replacement examples).

So, the best way to think about the building systems is to consider the BAR standard to each building system and not a change in the depreciable lives of these separate units of property.

[Sabre]

TXEA-Thanks- Folloow Question

When the HVAC finally does crap out how do I determine a cost to allocate to the old system which I am going to remove?
When I do set up the new system is their a certain depreciable life I can select?

Thanks

[TXEA]

The replacement of a building system is the same life as the building itself (27.5 or 39).

As for the figuring the amount to write off.....here is the general idea.....The Regulations provide for the any reasonable method if it is not practical to determine based on the taxpayers books and records. So, for example, one might use the average annual inflation for a reasonable time period discounted to the cost of the new

New Unit Cost $10,000

Old Unit 20 yrs old

Inflation 2.8%

Original Unit Cost would be - 5756.23

Then compute the depreciation that would have been taken on 5756.23 for # years owned and subtract from cost to get adjusted basis.

I guess this would be a reasonable method.

[TomJ]

I'm a bit confused about this too. If Grandma Jane has a rental property that she's been depreciating properly for the last 10 years (SL 27.5), does she need to file 3115 to change her UoP to each building system and start depreciating them separately? If she doesn't do that, does that change what she's able to deduct vs. what she has to capitalize in the future or does she just need to follow the RABI rules as they pertain to the building and each system in the building?

I'm surprised there aren't more repair regulation questions posted here. Some of the stuff is so confusing especially for a small taxpayer as it seems just about everyone with a rental or a side business has to file form 3115 this year and it's a beast to fill out.

[TXEA]

There is no requirement for an accounting method change to recognize the building systems. There is only a requirement to file a change in accounting method if the taxpayer is using a UOP definition that differs from the final regulation. You probably are not doing that unless you have broken down the costs for a residential rental using building systems different than those specified in the regs.

The disposition rules provide for allocating the cost basis to a disposed asset using reasonable methods (CPI, Inflation, Cost study, etc.).

And I agree, I do not understand why this entire board is not discussing the TPR's.

[TomJ]

TXEA - thanks for that. Definitely helps to clarify.

Now I have to come up with some way of deciding whether to file 3115 for the other accounting method changes for small clients who don't have any documented accounting methods, books, procedures, etc. I am leaning toward only filing 3115 if something was capitalized in the past, Sec 179 was not used, and so there is a 481(a) adjustment that the client can take. I can't think of a situation where anything would have been expensed that should have been capitalized. And it seems frivolous to file 3115 simply to adopt new methods that have no impact on the past years. It's a miserable form and there's no way I could explain to a client that they have to pay an enormous amount of money for the time it takes to fill out, with no impact on their taxes. Perhaps I'll attach a statement stating something to that effect (in a nicer way so as to not tick off an IRS agent who on the off chance might actually read it someday) just to indicate that the TP adopted the new rules and is complying with them.

[TXEA]

Tom - I think all we can do this year with Form 3115 is try and do the best we can. The average practitioner out there is just as confused as we are. I spoke to a partner with a large firm in my hometown last week, and he said they are not certain they are going to file any Forms 3115 unless they find a depreciation error (method, life, should have been expensed, should have been capitalized).

The IRS has not issued any meaningful advice as to all the questions that have been raised; however, I have heard they are working on a Q & A. It will probably be released on 10.15.15.