Our Client is a multi‐family real estate owner and operator of investment properties located in Colorado, Arizona, Indiana, and Missouri.
Our Client purchased two adjacent multi‐family apartment buildings (the “Project”), containing 38 units in November, 2013 for $3,825,000, or $100,000 per unit. Our Client originally acquired the Project by utilizing the proceeds of a like‐kind exchange from another property that was sold. The Project is in the Belleview‐Hale Neighborhood, close to the old University of Colorado Hospital campus at East Eighth Avenue and Colorado Boulevard in Denver. The current Belleview‐Hale Developer has agreed to buy the 26 acre campus and redevelop the area with a broad range of residential, office, and retail spaces.
Our Client decided to undergo a complete renovation of the Project, and spent $40,000 per unit to update/upgrade all the plumbing, electrical, structural, and design work. Our client faced the problem of how to best deal with the $40,000 unit cost that was spent on the renovation work, either as a capital expenditure that was to be depreciated over time, or as a deductible expense.
In September, 2014 the IRS issued much‐anticipated final “Repair” regulations that govern when taxpayers must capitalize or deduct expenses for acquiring, maintaining, repairing, and replacing tangible property. Prior to the final Repair regulations, a taxpayer that disposed of an asset was required to recognize the disposition on their tax return and discontinue depreciating the remaining cost of the asset. However, the process used to determine the cost of the removed building components is often complex. In addition, most taxpayers do not break out the acquisition cost of each building component on their fixed asset schedules properly, in order to comply with these new regulations.
Convergence provided favorable results to our Client by properly segregating the $40,000 per unit cost of the renovations into the different building components, which resulted in accelerated depreciation deductions and the identification of property that was eligible for bonus depreciation. In addition, Convergence made what is referred to as a “Partial Disposition Election”, which permitted our Client to recognize a loss on the abandonment of a portion of the building assets disposed of during the renovation process. Furthermore, Convergence took advantage of a newly expanded IRS rule dealing with building removal costs that were deducted in full, in the year the partial disposition occurred.
Our Client was able to claim a repair deduction equal to 80% of the original building acquisition cost as a result of the renovation Project. This was due to the fact that the building Project had a low cost basis that resulted from the like‐kind exchange originally utilized to acquire the Project. In addition, Convergence conducted a Cost Segregation Study that resulted in 18% of the renovation cost being accelerated and eligible for bonus depreciation. The two procedures utilized by Convergence resulted in $1,247,000 of tax deductions for our Client in 2014.
Convergence then carried these losses back two years to obtain refunds of all federal and state income taxes paid by our Client. In addition, it is anticipated that our Client will not have to pay any federal or state income taxes for another two years.