Depreciating capital improvement on historic building

Adding a security system to a residential or commercial building, the useful life would be the same as the structure...27.5 or 39 years. What about an historic building preserved by a NFP chartered to preserve historic properties? These historic buildings are not subject to depreciation, but what about the security system? Does the asset life follow the structure's asset life or general residential/commercial guidelines?

I really hoped someone would reply, because I did not want to ask this and show my ignorance, but here goes. Where does it say

These historic buildings are not subject to depreciation,

?

I'm at the same place as you, Len. So a not-for-profit preserves these buildings. Who owns the buildings? To what use are they being put? I don't do enough work in the historical building area to know, off the top of my head, of a situation where the buildings would not be depreciable but improvements might be.

These historic buildings are not subject to depreciation

Interesting idea; I'm eager for more information. I understand that historical artifacts like dinosaur fossils and ming vases must be capitalized without depreciation because the useful life is indefinite and the owner will take greater care than for medical skeletons and department store pottery lacking such cultural value.

But a whole building? The rule applies to collections, so I suppose it makes sense for the Betsy Ross House used solely as a museum. For the average old facade now gracing a real estate office, maybe not so much.

Anyway, the security system is not historical like that, not part of the collection, so I would guess it has a class life of 27.5 or 39 as appropriate for its use.

Is this the only authority? http://www.charitableplanning.com/document/681616

PLR 8641006 reaches the not-depreciable conclusion for a cello, basing its reasoning on Rev Rul 68-232. Arguable, in my view.

A few cases cite 68-232 on both works of art and old musical instruments, but the decisions go both ways and do not involve buildings.

Simon and Liddle both held that antique instruments used in the musician's trade or business were depreciable under ACRS. I'll stand by the questions in my earlier post.

I'm wondering if he's saying no depreciation b/c the building isn't being used for any purpose. It's just being rehab'd.

Or maybe the NFP doesn't own the building.

According to historicphiladelphia.org, In 1995, a private nonprofit organization, Historic Philadelphia, Inc., began leasing the property from the City of Philadelphia and continues to manage the site.

Independence Hall, according to us history.org, is different. The hall is owned by the city of Philadelphia. The land on which it stands is part of Independence National Historical Park, and is owned by the National Park Service.

All of which is interesting trivia, but still leaves open OP's question.

Back in the early 80s, you couldn't pick up the phone late in the year without some promoter offering Historic Credits. As I recall, the buildings simply didn't qualify for ACRS, but they were depreciated. I have this memory of investors buying up partnership interests in 19th Century Victorians converted to B&Bs in Cape May NJ.....the investors received the credits but also there was depreciation.

Form 990 Instructions:

Line 22. Depreciation, depletion, and amortization. If the organization records depreciation, depletion, amortization, or similar expenses, enter the total on line 22. Include any depreciation or amortization of leasehold improvements and intangible assets. An organization is not required to use the Modified Accelerated Cost Recovery System (MACRS) to compute depreciation reported on Form 990. For an explanation of acceptable methods for computing depreciation see Pub. 946, How to Depreciate Property. If an amount is reported on this line, the organization is required to maintain books and records to substantiate any amount reported.

The Rehab credit is the '86 Act, so citations that predate aren't much good. Both §47and Reg. §48-12 seem to indicate
depreciation is allowable. Certainly for improvements.

Great discussion and very humbling. I get that the capital improvement would be depreciated in the same manner as the building so that answers the question...if the building cannot be considered an inexhaustible historic treasure. The NFP in question owns 3 buildings and the charter of the NFP is to preserve and protect these buildings. I post this excerpt from the U of GA Business Procedures Manual:

Inexhaustible collections or items are items where the economic benefit or service potential is used up so slowly that the estimated useful lives are extraordinarily long. Because of their cultural, aesthetic, or historical value, the holder of the asset applies efforts to protect and preserve the asset in a manner greater than that for similar assets without such cultural, aesthetic, or historical value.
The straight-line depreciation method (historical cost less residual value, divided by useful life) will be used for exhaustible collections.

Note: Inexhaustible items should not be depreciated.

The U of GA doesn't take the position that any particular buildings meet this criteria, but the possibility is intriguing. I've not taken this position on any tax returns and thank you all for removing my head from my posterior before I do.

The NFP in question owns 3 buildings and the charter of the NFP is to preserve and protect these buildings.

I'm not sure if this post is backing away from or supporting the statement, "These historic buildings are not subject to depreciation."

How relevant to tax law is the University of Georgia's Business Procedures Manual? A few sections earlier it says, "All University System of Georgia institutions will use the straight-line depreciation method (historical cost less residual value, divided by useful life). Institutions will use the following-month convention for depreciation for indicating when the asset was rendered into service." That's just internal accounting--for tax purposes we would not normally use a residual value or following-month convention.

IRS has a report from 14 years ago, called Tax Aspects of Historic Preservation. http://www.irs.gov/pub/irs-utl/faqrehab.pdf. It's all about buildings and it's only about the rehabilitation tax credit. What else is there? Except that if a building is "not held for financial gain, but rather for public exhibition, education or research" (as the U of GA manual defines historical treasures), then it is not in productive use in a trade or business anyway, so obviously neither the building nor its improvements can be depreciated.

U of GA is only parroting FASB 116 which states:

Contributions of works of art, historical treasures, and similar assets need not be recognized as revenues and capitalized if the donated items are added to collections held for public exhibition, education, or research in furtherance of public service rather than financial gain.

Similar statements can be found elsewhere with a google search. I believe these buildings are being used for this purpose, but I can find nothing to support this as a tax position, hence my backpeddling.

I can find nothing to support this as a tax position

Does the non-profit corporation hold the buildings for productive use in a trade or business, or not?

When you take the rehab credit on a historic building, the basis has to be reduced by the amount of the credit but that should only be 20% of the basis that isn't depreciable at most.

Maybe. According to their mission statement, they hold these properties for preservation. Period. They do have a store in one of the buildings from which they sell books, soap, various other items to bring in revenue as part of their exempt function, but I wouldn't consider that holding the properties for the production of income. Are you suggesting that perhaps the buildings should in fact be an historical collection not subject to deprecation? That was my original take but apparently a minority view.

UpstateCPA...we were posting at the same time. No rehab here. These buildings were acquired in 1946, 1969 and 1986.