Generating a Cash Benefit from Previously Disposed Hotel Assets

By Philip Antoon Managing Director, Alvarez & Marsal Valuation Services, LLC | December 21, 2014

Co-authored by Mark Young, Managing Director, Alvarez & Marsal Taxand, LLC

How is it possible to generate cash savings from assets that have disposed of previously, in many cases years ago? The answer resides in recently released Internal Revenue Service ("IRS") regulations. If you have conducted renovations of your hotel and thus disposed of assets, yet are still depreciating the disposed assets for tax purposes, the new regulations allow for a deduction of the carrying value of the disposed assets. The effect is that by deducting the carrying value of the disposed assets immediately - rather than continuing to depreciate these assets over longer periods of time - there is a net present value savings generated by the deduction.

Without taking a deep dive into the world of tax, this opportunity for an immediate deduction for disposed of assets is set forth in the recently issued IRS "Repair Regulations" and is specifically provided for in the ability to make a "late partial disposition election."

Who Can Benefit

The profile of a business that can typically benefit from an asset disposition deduction – and the reason hospitality companies are ideal candidates – is that of one that owns and has conducted renovations on its properties. Accordingly, hospitality companies that own and thus depreciate their hotel properties for tax purposes will at a minimum want to consider if they could generate a cash tax savings from an asset disposition deduction in accordance with these regulations. Please note that since a taxpayer must have the depreciation rights to the assets, a company who is only managing hotels and doesn't own the properties would not be in a position to generate any benefit.

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