IRS Issues "Repair Regulations," Multifamily Industry Now Has to Figure Them Out

Washington, D.C.–As of the beginning of the year, there are new federal regulations regarding the tax treatment of costs incurred in acquiring, maintaining and improving tangible property, including multifamily buildings. The Internal Revenue Service (IRS) issued temporary (T.D. 9654) and proposed rules (REG-168745-03) on the matter just before Christmas–and now it’s up to members of the multifamily industry to figure out how they will affect their businesses.

The temporary rules are 255 pages long, contained in a document that also forms the proposed rules as they appear in the Federal Register. A spokesmanfor the National Multi Housing Council told MHN that his organization, like everyone else, had just received the document, and was at work determining how it will affect multifamily property owners.

Broadly speaking, the purpose of the new rules—”repair regulations,” as they’re sometimes called—is to clarify whether expenditures associated with tangible property should be considered capital improvements and depreciated over time or, alternatively, be ordinary and necessary repairs and thus deducted immediately from income. The regulations specify that expenses related to constructing or permanently improving a building, restoring property or converting property to an alternate use, must be depreciated. On the other hand, the new rules will allow taxpayers to deduct the cost of routine maintenance.

As the temporary regulations put it, their purpose is to “clarify and expand the standards in the current regulations … and provide certain bright-line tests for applying these standards. The temporary regulations also provide guidance under section 168 [of the Internal Revenue Code] regarding the accounting for, and dispositions of, property subject to section 168.”

Though the regulations are classified as “temporary” and “proposed,” they nevertheless have the force of a final regulation as of Jan. 1, 2012. Like any new regulations, however, they might take some time to digest. The following is an example of verbage that deals with “components of real property” (and which happens to mention an apartment property). It is found on page 94 of the regulations.

“X owns an apartment building that it leases in its business operation and discovers that a window in one of the apartments is broken,” the proposed regulations state. “Assume that the building, including its windows, is a unit of property under §1.263(a)-3T(e) and the window is not a rotable or temporary spare part under paragraph (c)(2) of this section. X pays for the acquisition and delivery of a new window to replace the broken window.

“In the same taxable year, the new window is installed. Assume that the replacement of the window does not improve the property under §1.263(a)-3T and that X does not recognize gain or loss on the disposition of the broken window. The new window is a material or supply under paragraph (c)(1)(i) of this section because it is a component acquired and used to repair a unit of property owned by X and used in X’s operations.

“Under paragraph (a)(1) of this section, the amounts X paid for the acquisition and delivery of the window are deductible in the taxable year in which the window is installed in the apartment building. See §1.168(i)-8T for the  treatment of the disposition of the broken window.”