IRS Provides Automatic Change in Method for OREO Carrying Costs

 

On Friday, January 24, 2014, the IRS issued Revenue Procedure 2014-16, which provides financial institutions an opportunity to make an automatic change in accounting method for tax purposes for expenses incurred in holding their non-operating other real estate owned (OREO).

 

Change in Capitalization Position

In the past, the IRS had taken the position that foreclosure and holding costs for property acquired through foreclosure or deed-in-lieu of foreclosure should be capitalized as part of the property's basis and, thus, not deducted until the OREO property is disposed. The IRS then issued informal advice on February 22, 2013, conceding that OREO holding period costs are not subject to capitalization for income tax purposes.

 

Automatic Change in Accounting Method

Some financial institutions changed their tax method of accounting to conform to the IRS' earlier position that non-operating OREO carrying costs should be capitalized. In most cases, the only way to stop capitalizing these costs is to file Form 3115 (Change of Accounting Method).

 

Under new Revenue Procedure 2014-16, financial institutions can  now make an automatic change to treat OREO carrying costs as curently deductible, accelerating the tax benefit of these expenditures.  

 

2013 Tax Returns

This Revenue Procedure is effective January 24, 2014. This means that a calendar year financial institution can make this change for its 2013 tax year. The IRS has waived its usual limitations on automatic method changes for two years so even a financial institution that is under exam or has made a similar change in the last five years can still take advantage of the automtic method change procedures.

 

If you have questions about whether this important new development applies to your financial institution's tax situation, contact your Eide Bailly tax advisor.