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Property located outside United States subject to different depreciation rules.

In 1981, Congress enacted accelerated write-offs of capitalized assets by adopting the accelerated cost recovery system {ACRS}. Assets were assigned to one of eight recovery classes, depending on their present class lives (as established under Rev. Proc. 83-35}. These recovery classes consisted of three-, five-, 10-, 15-, 18- and 19-year property, 15-year public utility property and 15-year lowincome housing property. However, Congress expanded the number of recovery classes/or property predominantly used outside the United States. Instead of eight recovery periods, property used predominantly outside the United States was assigned to a recovery period equal to its class life. As a result there were 37 different recovery periods for this type of property. Depending on what type of property was involved, there could be a significant difference in its depreciation deduction.

Property predominantly used outside the United States is defined under Prop. Regs. Sec. 1.1682(g)(5)(i) and iii}. The number of days the property is physically outside the United States is compared to the number of days the property is physically inside the United States. If the latter exceeds the former, use is not predominantly outside the United States. There are, however, 11 safe harbor categories that would cause the property to be considered as used domestically. See Example l on page 516.

Under current law, the modified accelerated cost recovery system (MACRS} continues unequal treatment for property used outside the United States but has changed the method of computation. Sec. 168(g)(1)(A} provides that property predominantly used outside the United States must use the "alternative depreciation system." The definition of predominant use outside the United States under post-1986 MACRS is the same definition as under pre1987 ACRS. The table above (top} summarizes some of the alternative depreciation system recovery periods.

The table in Example 2, above, compares the depreciation deductions for the initial year under MACRS using the facts in Example 1, except that the assets were placed in service on Jan. 2, 1987.

Hardest hit as a result of the 1986 revision was residential and nonresidential real estate, the longer recovery period significantly reduces annual depreciation deductions each year.

Many people own or are considering owning real estate in foreign countries. Careful consideration should be given to the depreciation deductions available when deciding whether to purchase foreign real property. A taxpayer considering buying rental property in Canada, for example, may have significantly lower depreciation deductions than if he made the same purchase in the United States.

From Maura P. Flynn, CPA, Cohen & Company, Cleveland, Ohio
COPYRIGHT 1992 American Institute of CPA's
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Flynn, Maura P.
Publication:The Tax Adviser
Date:Aug 1, 1992
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