Tax Insights

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What is a real estate unit of property?

tangible property regulations, property, real estate, taxWondering what is this “unit of property” term you keep hearing? Well, here is your answer.

The IRS issued new regulations in 2013 and 2014 trying to bring clarity to the many conflicting rules in the area of capitalization versus expensing of business property. These new regulations are commonly called the “tangible property and repair regulations,” or TPR regulations.

The new regulations, which apply to tax years beginning in 2014, have many new provisions, including new “safe harbors” and definitions which affect all businesses that have depreciable property or pay for supplies and repairs.

One of the new definitions in the regulations is “unit of property.”

Per the regulations, a “unit of property” is comprised of all components that are functionally interdependent. So, a truck (including its engine, chassis, doors, etc.), or a building and its structural components (including the walls, roof, windows, etc.), comprise a unit of property. Conversely, a computer and printer are separate units of property because placing the computer in service is not dependent upon placing the printer in service.

Whether an expenditure is capitalized or expensed depends on whether the expenditure results in a betterment, restoration, adaptation or improvement of a unit of property.

The typical building is divided into the building structure and nine defined “building systems.” So for purposes of applying the TPR regulations, each building is divided as:

  • Building structure including roof
  • HVAC
  • Plumbing systems
  • Electrical systems
  • Escalators
  • Elevators
  • Fire protection and alarm systems
  • Security systems
  • Gas distribution system
  • Any other system defined by the Treasury

Using the appropriate “unit of property” can keep taxpayers from over capitalizing expenditures.

Melinda Nelson CPA + Michael Willett