The property
An 18,400 square foot seven-bay neighbourhood retail center built in 2009, acquired in 2021 for $3,900,000. Land allocated at $800,000, leaving $3,100,000 of depreciable basis. Ninety-six space parking lot, detention pond, pylon signage, landscaped islands. Tenants include a nail salon, a pizza restaurant, an insurance office and a dental practice.
Owner is a partnership with substantial passive income from other holdings.
Without a study
$3,100,000 over 39 years: about $66,346 in a full year after the mid-month convention. Five years of ownership from 2021 to 2026 produced roughly $310,000 of cumulative depreciation.
The reclassification
5-year property — $310,000. Storefront glazing serving tenant spaces, decorative and display lighting, floor coverings, dedicated electrical for the restaurant's kitchen equipment and the salon's stations, specialty plumbing at the salon and dental suite, tenant signage and awnings, security systems, POS and data cabling.
15-year land improvements — $690,000. Asphalt paving and base, sealcoat and striping, concrete curbing and sidewalks, ADA ramps, wheel stops, storm drainage and detention pond structures, parking lot pole lighting, pylon sign foundation and site electrical, landscaping islands and irrigation, trash enclosure and bollards.
39-year property — $2,100,000. Foundations, structural frame, demising walls, roof, exterior masonry, rooftop HVAC serving spaces generally, fire protection mains, base electrical service.
Total reclassified: $1,000,000, or 32.3% of basis.
The look-back
Because the property went into service in 2021 and has been on a straight-line 39-year schedule since, this is a Form 3115 change rather than a current-year study.
Recomputing from 2021 with the bonus rates applicable in that year, cumulative depreciation should have been roughly $1,240,000 against the $310,000 actually claimed. The section 481(a) adjustment is approximately $930,000, deductible in full on the 2026 return.
The outcome
At a combined 35% rate, roughly $325,000 of tax deferred in a single year, against a study and Form 3115 fee of $8,400.
The partnership had ample passive income from other holdings to absorb the loss, so it was usable in full in the year taken.
What the inspection found
Two things documents missed. The parking lot had been resurfaced in 2019 by the previous owner and the original surface remained buried in the acquisition basis. And the dental suite's build-out — funded by the landlord in 2022 — had been capitalised to the building at 39 years when it was qualified improvement property at 15.
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