On December 23, 2011, the Internal Revenue Service (IRS) issued temporary (T.D. 9654) and proposed rules (REG-168745-03) regarding the tax treatment of costs incurred in acquiring, maintaining, and improving tangible property, including multifamily buildings.
These so-called repair regulations clarify whether such expenditures should be considered a capital improvement and depreciated over time or, alternatively, be viewed as an ordinary and necessary repair and 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. However, the new rules allow taxpayers to deduct the cost of routine maintenance.
Despite being issued in temporary and proposed form, the regulations are effective as of January 1, 2012, and have the same force as a final regulation.
Notably, on March 7, 2012, the IRS issued guidance (Revenue Procedures 2012-19 and 2012-20) that addresses how taxpayers may obtain the automatic consent of the IRS to change accounting methods to comply with the regulations. Revenue Procedure 2012-19 addresses accounting methods related to repairs and maintenance, capital expenditures, and the acquisition, production, and improvement of tangible property. Revenue Procedure 2012-20 addresses the depreciation and disposition of property.
Ernst & Young have prepared this summary of the rule.