An Abandonment Study can legitimately generate a windfall of
depreciation for the owner of investment or owner-occupied real estate.
By increasing depreciation, substantial tax reduction can be attained.
An abandonment study is appropriate when it is necessary to
demolish or substantially renovate tenant improvements within a
building. When existing tenant improvements are demolished, the
undepreciated basis for the tenant improvements can be deducted in the
year in which it is realized they no longer have value or when the
demolition occurs. The current owner can deduct the undepreciated cost
of the tenant improvements even if the prior owner disbursed payments
for the tenant improvements. The tax cut available from improvements
installed by previous owner or tenant is not intuitive.
An abandonment study identifies the value of the demolished or
If the current owner paid for the tenant improvements, the remaining
cost basis is simple to calculate in an abandonment study. However, if
a prior owner paid for the tenant improvements, it is unlikely cost
data is available to the current owner. Further, even if
cost is available to the current owner, that cost is not necessarily
the current owner's initial or undepreciated cost basis. (For an
abandonment study, it is not relevant whether the current owner paid
for the tenant improvements. If the prior owner or even the tenant
paid for the tenant improvements, and the owner did not expect the
tenant to be leaving at the time of acquisition, an abandonment study
identifies the tenant improvements as a portion of the assets
purchased.) Tax help can originate from unexpected sources.
By obtaining an abandonment study, the current owner can determine
the undepreciated cost basis for the tenant improvements which are
being abandoned. This abandonment study will identify the replacement
costs of the assets, extract an appropriate cost basis for the
improvements being abandoned from the current owner's purchase price
and calculate a depreciated cost basis which may be deducted from the
Depreciation of tenant improvements is a difficult process to execute effectively. Accurately depreciating tenant
improvements can substantially reduce income tax liability and increase both cash flow and total investment return.
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