C/O and placed-in-service date ?

Technical topics regarding tax preparation.
#1
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Partnership buys land in 2022 and starts construction of a car wash. The partnership will lease the real property to an unrelated tenant who will purchase all of the equipment and run the business. The tenant will start paying rent once the C/O has been issued, which is projected to be in the last week of December... but could get delayed. The car wash is not expected to open until sometime in 2023.

Is the C/O the determining factor for the placed-in-service date of the real property or does the car wash need to be operating before for deprecation on the tunnels starts? Any chance PIS for the tunnels could be prior to the C/O date?
 

#2
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There’s a start up question or interaction of the placed in service date. Look up piggly wiggly on Taxprotalk. I believe in the case the overall company was in business already. So on your case it won’t matter that you have the c/o because they’re pre start up.
 

#3
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Tax Me Up wrote:The car wash is not expected to open until sometime in 2023.

Is the C/O the determining factor for the placed-in-service date of the real property or does the car wash need to be operating before for deprecation on the tunnels starts?

It doesn't matter whether the car wash delays operating. That's the tenant's business, not the landlord's business. The landlord doesn't really care whether the tenant mismanages the car wash business and sits around for months of delays before opening to car wash customers. The landlord just needs to make sure that the landlord is providing a useable property to the tenant - providing property for use is the landlord's line of business.

So it seems to me that the landlord isn't providing property for use if the car wash is not allowed to (and actually does not) use the property, prior to the certificate of occupancy being issued. And therefore the landlord is still in the startup phase (if indeed the startup rules apply to rental activities, which is a different technical question).

If the startup rules apply to the landlord, and the landlord is still in the startup phase, then I believe you can't consider any depreciable assets placed in service yet.
 

#4
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beardenjv wrote:The landlord just needs to make sure that the landlord is providing a useable property to the tenant - providing property for use is the landlord's line of business.

So it seems to me that the landlord isn't providing property for use if the car wash is not allowed to (and actually does not) use the property, prior to the certificate of occupancy being issued. And therefore the landlord is still in the startup phase (if indeed the startup rules apply to rental activities, which is a different technical question).


Thanks for sharing your insight. My read of Treasury Reg 1.167(a)-11(e)(1) agrees with your analysis. This is a big deal for the landlord because car wash tunnels are 15 year bonus eligible and landlord is looking for a big passive loss in 2022. The obvious concern is that the CO may not be issued until January.

Assuming the car wash structure is substantially complete and the tenant (and their contractors) have access to the property in December and prior to the issuance of the CO, perhaps the landlord's placed-in-service date for the tunnels can precede the CO.

Any thoughts / issues with basing PIS on tenant's actual use of property instead of the CO date?
 

#5
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I'd think you've got a position to be aggressive. I've not researched the CO issue, but to me, as soon as the real estate is made available and ready for use to the tenant, it's in business. I don't care about HIS CO....but I do wonder if the lease takes effect in Dec. or Jan?
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#6
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Tax Me Up wrote:Assuming the car wash structure is substantially complete and the tenant (and their contractors) have access to the property in December and prior to the issuance of the CO, perhaps the landlord's placed-in-service date for the tunnels can precede the CO.

Any thoughts / issues with basing PIS on tenant's actual use of property instead of the CO date?

The startup period end date and the place-in-service date should certainly be no later than the date the tenant's actual use of the property starts.
 


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