Environmental Remediation Costs

Technical topics regarding tax preparation.
#1
Posts:
444
Joined:
16-Jan-2015 12:54pm
Location:
Chicago
Client purchased commercial rental building and had to do some environmental remediation. He's removed an underground oil tank which was leaking and then had to have the contaminated soil removed and replaced. This was all done from inside the building. It all turned out to be a bigger and more costly problem than originally told. From what I see, the costs have to be capitalized as they existed prior to his purchasing the building. However, can these costs be depreciated? And over what period of time? The same time from as the building? Or would they be related to land and not depreciated?
 

#2
Webster  
Posts:
317
Joined:
5-Nov-2015 5:05pm
Location:
On TPT, of course
I would not say same as the building. I think the determination is between land improvement or addition to basis. Nothing was added to the land; without some research, I would say the latter. Maybe Coddington will be along to set me straight.
 

#3
Noobie  
Posts:
1134
Joined:
22-Apr-2014 1:35pm
Location:
Jacksonville, FL
Addition to basis if he knew about them prior to purchase.

Did it happen to be a towing company?
 

#4
Posts:
716
Joined:
22-Apr-2014 1:49pm
Location:
San Francisco
 

#5
Doug M  
Posts:
3558
Joined:
22-Apr-2014 1:09pm
Location:
Oregon
It's an expense.

§198

https://www.law.cornell.edu/uscode/text/26/198

Rev Proc 98-47. I don't think any of this changed with the repair reg's., particularly tank removal and asbestos removal

https://www.irs.gov/pub/irs-drop/rp-98-47.pdf

Also what comes into play is if the property has been changed to a new or different use. And I am assuming this was a pre-existing contamination.
 

#6
Coddington  
Moderator
Posts:
2567
Joined:
21-Apr-2014 8:50pm
Location:
Fort Worth, TX
Section 198 no longer applies. It sunsetted on December 31, 2011.

Example 1 of section 1.263(a)-3(j)(3) is applicable. It is an amelioration of a pre-existing defect, so it is a betterment. Assuming the tank was not replaced with a non-leaking tank, the betterment would be capitalized to the non-depreciable land's basis.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#7
Noobie  
Posts:
1134
Joined:
22-Apr-2014 1:35pm
Location:
Jacksonville, FL
Agree with Coddington, especially if they knew about it before purchase, which would have lowered the purchase price significantly.
 

#8
Posts:
444
Joined:
16-Jan-2015 12:54pm
Location:
Chicago
Thanks. The previous tenant (under prior owner) was not a towing company but automotive repair. They definitely knew about it before the purchase, so it definitely can't be an expense, so was hoping there would some way to depreciate. They did get a better price on the property. Unfortunately, the problem turned out to be much bigger than anticipated.
 

#9
Nilodop  
Posts:
18758
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
OP hopes tp find some way to depreciate the remediation costs, or at least some of them. Applying OP's facts to my assumptions, what happens to basis allocation here?

Buyer's expectation
Total value of land and building after remediation will be 1200, allocable 300 to land, 900 to building
Purchase price 1000, with no allocation specified between land and building
Expected cost of remediation of land 200
Thus, allocation would have been 300 to land and 900 to building

Actual
Remediation cost of land turns out to be 600
So total basis will be 1600
But value is still only 1200 (because buyer overpaid)

Allocation
Value of land 300, value of building 900. so 25% of 1600 to land and 75% of 1600 to building
Land 400, building 1200
Voila!. We've added 300 of the extra 400 remediation costs to the building.

Rationale
Had we known what the real remediation cost would be, we'd have paid only 600 total for the property
The land's actual value would have been -300
The building's actual value is (still) 900
We'd allocate all the remediation costs to land, for a total cost basis of 300

Is there authority for such an approach? Had the seller paid the extra 400 remediation costs (which we made him do by lowering the purchase price by 400), he'd have a lower gain or higher loss by that much, and we'd have paid 1200 as described above - 300 and 900.
 

#10
zl28  
Posts:
2067
Joined:
22-Apr-2014 10:27pm
Location:
usa
Would you recall why it makes a difference if the tank was replaced or not? Example 1 of section 1.263(a)-3(j)(3) is applicable. It is an amelioration of a pre-existing defect, so it is a betterment. Assuming the tank was not replaced with a non-leaking tank, the betterment would be capitalized to the non-depreciable land's basis.
 


Return to Taxation



Who is online

Users browsing this forum: Coddington, Google [Bot], Google Adsense [Bot], JoJoCPA, MAPCPA60, mariaku, sjrcpa and 158 guests