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Deductibility of asbestos removal costs.

In recent years, the cost of asbestos removal has become a significant expenditure for many building owners. Removal procedures can vary from small sections of a building as asbestos becomes exposed to planned programs for an entire building. In all cases, building owners typically attempt to gain the most benefit from the tax treatment of these costs.

Building owners generally believe that asbestos removal costs do not improve the property or prolong its life, but keep it in ordinary, efficient operating condition. It is argued that while the costs can be substantial, they are minor in relation to the total value of the property. Essentially, these costs restore the property to-its original value and do not make the property any better.

In a recent Technical Advice Memorandum, the Internal Revenue Service has disagreed with the deductibility of these costs. In a situation regarding the removing and replacing of asbestos insulation in certain manufacturing equipment, the IRS has ruled that these costs are not deductible and should be capitalized. The IRS believes that these costs are not similar to incidental repairs and are more in the nature of capital expenditures. In determining whether an expenditure is a deductible repair, the extent and permanence of the expenditure must be analyzed. The costs associated with permanent improvements, must be capitalized, while a repair is not a permanent cure but just remedies immediate consequences. The position of the IRS is that the cost of asbestos removal accomplishes a permanent improvement and results in a significant change and is not remedial.

Furthermore, according to the IRS, the reduction of the human health risk posed by the asbestos presence increases the value of the property and enhances its marketability. Likewise, it may also result in the owner becoming better able to obtain financing on the property. Also, the IRS notes that several courts have held that modifications made to bring property into compliance with local regulations and requirements also increase the value of the property.

Basically, the IRS believes that property from which asbestos has been removed is inherently more valuable than property that contains asbestos. Accordingly, the IRS maintains that these costs must be capitalized as improvements or betterments to property.

While this IRS ruling involved an owner of manufacturing equipment, many of the arguments presented and the resulting decision have applicability to asbestos removal from buildings. While this memorandum does not have the force of a law, regulation or court decision, property owners should be aware of the direction in which the IRS is currently heading.

As a result of this ruling, various industry groups are urging the Treasury Department to issue regulations or other guidance to permit the deduction of these costs. It is felt that this ruling will make it economically infeasible for many property owners to begin removal and will penalize those who do proceed. Also, it was suggested that the Treasury Department should encourage, rather than discourage, actions that further public policies, such as reducing asbestos hazards in the work place.

Jeffrey Stavin specializes in the tax and accounting aspects of real estate ownership, operation and development. He has served on real estate and tax committees of the New York State Society of Certified Public Accountants.

Friedman Alpren & Green has responded to inquiries regarding previous articles and is pleased to discuss these and other tax questions posed by the readership of Real Estate Weekly. Any such questions should be directed to their office at 1700 Broadway, New York, New York.
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Title Annotation:analysis of tax treatment of asbestos removal costs
Author:Stavin, Jeffrey
Publication:Real Estate Weekly
Date:Oct 14, 1992
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