Remember a few years back the song "The Times They Are A-Changin'" if so the words to the first verse will come to mind if not here they are...
Come gather 'round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You'll be drenched to the bone
If your time to you
Is worth savin'
Then you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'.
And I can't think of a better way to describe the latest changes the IRS has made in real estate depreciation vs capital improvement. As it's now sink or swim when it comes to understanding and using the new IRS Regs relating to real estate depreciation.
The IRS starting this year now dictates 8 different separate components when dealing with real estate property and determining what is an expense and what is a capital improvement . So any cost must be studied to see if it's an improvement/repair based on the overall value of the specific component and not the cost of the building as a whole.
There are more rules (actually over 100 pages) and that certainly sounds daunting but with care this is a HUGE win if you have property. For years, I've talked about cost segregation studies with my clients and I was specific in what they were called. That's because the IRS shut down something called component accounting for buildings years before. There had been a lot of misuse of this tax break and so the IRS reacted by shutting component accounting down. But the general principle of breaking down the different segments of your real estate was still valuable if used as part of an overall tax strategy. So the cost segregation study nomenclature was born.
Now the IRS's new regulation requires you to divide up your property along the very lines of a cost segregation study. That means you'll be able to front-end load your depreciation, if you want, to create more of a tax loss. Of course, this only works if you're able to take advantage of the loss against other income. This is important because not only does it take away the past potential issue with component segregation, but it is actually required to break down your property with something like a cost segregation study.
Anyway if you have real estate that you use as rental or as part of a business and thus have depreciation be sure you take time to study and go over this issue.. and of course if it's all Greek to you feel free to call and I'll be happy to help you understand it.
Remember it's only with knowledge that you have the power to legally lower your taxes so it's keep up or lose out.