Using General Asset Accounts to Minimize Land Value
Property owners that plan to demolish a building in the foreseeable future are often surprised by the unfavorable tax consequences that result from the action. Code Section 280B states that if a property owner demolishes a building, then any remaining basis in the building structure and any associated demolition expenses must be added to land. Since land is a non-depreciable asset, this has rule has caused all depreciation deductions from the building to be wiped out moving forward. Fortunately, there are a few ways to work around these requirements, including the use of a general asset accounts (GAA).
General asset accounts increased in popularity with the Tangible Property Regulations and are commonly known to be used to help ease the tracking of depreciable property. GAAs allow taxpayers to group multiple assets with similar characteristics together into a single account, and the account can be depreciated as if they were a single asset for tax purposes. In addition to being used as an easy solution for tracking, they can also be used as a valuable tax planning tool to help avoid land costs that result from demolishing a building. Under Code Section 1.168, a taxpayer using a GAA has the option to continue or discontinue the general asset account when an included asset is disposed of. If the property owner chooses to continue to use the GAA, then all assets in the GAA must remain and no basis gets added to land, even with a disposed building asset included. This is due to the fact that to remain a GAA, the basis must be depreciated until all included assets have been disposed of. In this scenario, the property owner is exempt from the rules under Section 280B and the asset would continue to be depreciated over the 27.5 or 39-year life of the building.
While this strategy seems relatively simple to execute, it is important to consider some of the nuances of using GAAs during annual tax planning or as soon as assets are acquired. In terms of timing, the GAA election must be made on a timely filed tax return in the first year that a building is placed into service, and it cannot be made on an amended return. There are also a number of specific rules surrounding General asset accounts that might cause unintended negative consequences, including the fact that partial dispositions are generally not allowed in a GAA. While GAAs might bring value when demolishing a building, they can also take away opportunities for increased cash flows due to partial dispositions not being available.
General asset accounts can be an extremely valuable planning tool to avoid those dreaded land costs after demolishing a building. It is best to consult with a fixed assets expert to ensure that property owners are maximizing the advantages that a GAA can bring to the table and doing so at a time that can benefit the business. If you have any questions about this regulation, please reach out to our Fixed Asset Services team. Learn more about our services and connect with an expert here.