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Dear Tax Talk,
I purchased a building and land in which to run my business for $275,000, closing on Dec. 28, 2012. I paid $40,000 down. Is any of that down payment deductible for 2012? I owe about $12,000 in taxes right now and I am trying to reduce it.
The short answer is no, you cannot deduct the $40,000 down payment on your 2012 income tax return. What you need to do is depreciate the entire cost of the building over the course of a 39-year schedule as outlined by the Internal Revenue Service.
Depreciation is an annual deduction that will enable you to recover the costs of a building as they are incurred. It is basically an allowance for the wear and tear and subsequent deterioration of the property as you are using it. Since the building was purchased Dec. 28, 2012, the depreciation for the year will be very minimal. After all, how much wear and tear could you have done to the property in the three days before the calendar flipped to 2013? Not much, according to the IRS schedules.
It is important to note that the IRS makes a distinction when it comes to the land that was purchased. Because land does not deteriorate or become obsolete like a building or a piece of equipment, the IRS does not allow you to depreciate it. You will need to allocate a portion of the $275,000 purchase price to the land and separate it from the depreciation schedule of the property. However, be sure to include any and all closing costs and Realtors’ fees into the transaction price, as those are allowed to be depreciated.
Commercial real estate depreciation is calculated on IRS Form 4562.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.