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TAX ALERT: New IRS Position on OREO Expenses

March 6, 2014

Attention: All Clients 

Just over a year ago, an internal IRS Generic Legal Advice Memorandum (GLAM) was made public, which indicated that the IRS was changing its position on capitalizing the holding costs related to foreclosed real estate properties (OREO).  In the past, the IRS took the position that these costs must be capitalized, and were therefore not allowable deductions until the related property was disposed of.  The GLAM reversed this position, and indicated that the OREO costs should indeed be allowable deductions as incurred. 

We have been awaiting formal guidance on this topic, and recently on January 24, 2014, the IRS issued Revenue Procedure 2014-16, which addresses this.  The IRS has decided that a Change in Accounting Method, Form 3115 should be filed, but they have facilitated this filing by assigning this particular issue a “Designated Automatic Accounting Method Change Number” (DCN).  This means that the taxpayer just needs to complete the Form 3115, with a description of the change and with the DCN of 195. This change is then automatically approved. 

You should consider having this change in accounting method Form 3115 filed.