"transitional rule" was passed (P.L. 98-612)" which altered and partially suspended the use of the Applicable Federal Rate to determine if unstated interest is present on a temporary basis. Until July I. 1985. the 9"10 safe harbar. and 10% imputation rates will still apply for transactions where the borrowed amount is $2.000,000 or less. Where more than $2.000,000 is involved. a combination of the two concepts is used. 12 Assumptions of Debt. It is important to keep in mind that the new deferred payment rules apply to assumptions of existing debt as well as new borrowings. The actual mechanics ot application will be clarified by regulation. However, P.L. 98-612 contained another change which made this provision inapplicable to debt obligations issued before October 15, 1984. on a permanent rather than interim basis. I:! ACRS Recovery Period. The accelerated cost recovery system ("ACRS") was added in 1981 as an important part of Economic Recovery Tax Acl. Under ACRS, most real property placed in service after 1980 could be depreciated over a period as short as fifteen years. The Act increases the recovery period for commercial and residential real property. with the exception of low income housing. to eighteen years." The longer recovery period is also applicable to additions to an existing structure. even if the existing structure qualified for fifteen year ACRS depreciation. Other minor changes in calculating the amount of the annual deduction under ACRS were also made. to be implemented by Treasury regulation.
was allowed with respect to any costs or losses associated with the demolition of a certified historic structure. All such costs and losses had to be added to the taxpayer's basis in the underlying land and could not be expensed, depreciated or amortized. The Act eliminates any deduction for costs or losses associated. with demolition of any structure and applies the old rule for certified historic structures to the demolition of any structure, whether certified historic or nol." Therefore. in the future. taxpayers will not be able to allocate a portion of their purchase price of property to a building and later deduct their basis in the building when it is demolished. Removal of Architectural Barriers. For a period of time prior to
1983. a special deduction of up to $25,000 was allowed for expenses incurred during a taxable year in removing architectural barriers to the handicapped or elderly. This provision was rather narrow in
scope because it could not be claimed in connection with a general renovation of abuilding.
Further. it only applied to removal of certain specific types of barriers set out in the regulations. The Act reenacted this provision and increased the deduction to $35.000 per year for expenses incurred during 1984 and 1985." However. the previous limitations on the scope of the provision will continue to apply. Construction Interest and Taxes. There has been a general rule that interest and taxes incurred while a project is under construction cannot be deducted as expenses. Instead. these expenses must be capitalized and amortized over a ten year period. 17 However. this rule does not apply to construction of low income housing. and other projects which the Congress classified as not suited for profit making activity. In the past, another exception has allowed interest and
taxes incurred by corporations (but not individuals or partnerships) in connection with the construction of residential property to be deducted. These rules appear to have come /rom an attempt by the Congress to bal-
Provisions Affecting Construction
and Rehabilita1ion Demolition Deductions Disallowed. Under prior law. there was a general rule that costs and other losses incurred in connection with the demolition of a building qualified as losses and could be deducted when incurred. However, there was a general excep-
tion to the rule that such costs and losses could not be deducted and must be added to the basis in the land, if the land and building were purchased with the intent to demolish the building. fn addition. pior to 1984, no deduction SO/Arkansas Lawyer/April 1985
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