Category: Real Estate; Accounting Periods & Methods
Subject: Depreciation
Title: Placed in Service Issues, Staged Completion of Building
IRC Sections:
Filename: 1376.html
Date Produced: 05/98

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

Background
Taxpayer built a commercial building. A certificate of occupancy (CO) was issued for the shell. Six weeks later, tenant improvements were completed and a CO was issued for the improvements. Shortly thereafter, the tenants moved in.

Issue
When is the building considered placed in service?

Answer
The building is placed in service in stages. The cost attributable to the shell is placed in service at the time the CO was issued for the shell. The cost attributable to the tenant improvements is considered placed in service when the CO was issued for such improvements.

Discussion
An asset is placed in service when it is in a condition or state of readiness and availability for its assigned use. Rev. Rul. 76-238, 1976-1 CB 55. The taxpayer need not put the asset into actual use.

I assume that the building in question would be subject to MACRS depreciation. There are as yet no regulations under the MACRS system, but proposed regulations under ACRS deal with the issue of buildings which become available in stages. It is widely assumed, although the matter has never been tested to my knowledge, that the ACRS regulations are applicable to MACRS issues.Proposed Regulation 1.168-2(e)(3) provides as follows.

(3) Recovery for a building which is made available in stages. This subparagraph (3) (and not subparagraphs (1) and (2) of this paragraph) applies to a building which is made available in stages. For purposes of this section, a building shall be considered placed in service (and, therefore, recovery will begin) only when a significant portion is made available for use in a finished condition (e.g., when a certificate of occupancy is issued with respect to such portion). If less than the entire building is made available, then the unadjusted basis which is taken into account under this section shall be that amount of the unadjusted basis of the building (including capital expenditures for any components) as is properly allocable to the portion made available. If another portion of the building is subsequently made available, then that amount of the unadjusted basis (including capital expenditures for any components) as is properly allocable to the ensuing portion shall be taken into account under this section when such portion becomes available. The taxpayer must use the same recovery period and method for all portions of the building.

Based on this regulation, when the shell of the building becomes available for its assigned use, then the cost associated with that portion is considered placed in service at that time. When the tenant improvements are ready, the associated cost is considered a separate building placed in service at the time the improvements are ready.