Relief Provided to Banks for Costs of Acquiring and Holding Foreclosed Real Estate

Jan. 30, 2014

Recently released Revenue Procedure 2014-16 that implements the tangible property regulations provides welcome relief for financial institutions that acquire real estate through foreclosure or similar proceedings. A 2012 IRS Field Attorney Advice indicated that a bank was required to capitalize costs related to the acquisition and holding of other real estate owned (OREO) because it was concluded that the property was held for resale. The IRS changed course in 2013 with a Chief Counsel Memorandum issued by the IRS national office, holding that such property was not acquired for resale; therefore, capitalization of costs to acquire and maintain OREO was not required.

The revenue procedure confirms the IRS national office’s position that costs of acquiring and holding OREO are not required to be capitalized if a taxpayer does both of the following:

  • Originates or acquires and holds for investment loans that are secured by real property
  • Acquires the real property that secures the loans at a foreclosure sale, by deed in lieu of foreclosure, or in another similar transaction

It is important to note that the relief is limited to costs of acquiring and holding OREO. Any improvements to OREO continue to be capitalizable.

An automatic accounting method change is available to adopt the current IRS position that costs of acquiring and holding OREO are deductible when incurred. The revenue procedure is effective for method changes filed after Jan. 24, 2014, and also waives certain scope limitations for the first and second taxable years ending after Dec. 31, 2012. For example, a taxpayer under examination may file an automatic consent method change with his or her current-year tax return. This method change generally will result in a taxpayer-favorable adjustment that would be taken fully in the year of change.

The change for OREO is just one of many accounting method changes provided by the revenue procedure, and it should be analyzed together with all of the changes that are required to comply with the tangible property regulations.

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