ASSET ABANDONMENT is a cost-basis analysis service designed to assist clients in managing their taxable income by properly accounting for deductions related to the abandonment or retirement of certain assets. Our service includes proper identification and value allocation of building improvements that are no longer in service, and that might have an immediate impact on current tax liability.
Multi-tenant property owners, who have not had a detailed building purchase price allocation performed at the time of purchase, or don't have construction documentation tracking the depreciable basis for individual tenant or former leasehold improvements, may have difficulty in being able to properly identify the remaining depreciable basis for the improvements when they are retired from service. This is especially true for taxpayers who typically purchase real estate to hold and manage.
Taxpayers can generally recover the adjusted basis of certain property in order to determine gain or loss upon its disposition. A leasee may take into account improvements made but not retained upon lease termination to compute gain or loss.
Prior to 1996, a lessor's treatment of improvements was less clear. For example, if a lessor replaces an old roof with a new roof subject to depreciation for federal income tax purposes, the lessor must continue to depreciate the remaining basis of the old roof as part of the cost of the underlying building in addition to the cost of the new roof. Similar treatment was mandatory for new leasehold improvements as existing build-outs were replaced.
Part of the Small Business Job Protection Act of 1996, Section 1121, relates to Treatment of abandonment of lessor improvements at termination of lease. Under this title, the treatment of leasehold improvements for both the lessor and lessee has been brought into conformity.
Accordingly, these improvements are treated for purposes of determining gain or loss under this title, as disposed of by the lessor, when so disposed or abandoned. The provision is effective for leasehold improvements disposed of after June 12, 1996. There is also a provision for a look-back analysis to provide basis for unused allowable depreciation