On July 1, the IRS issued a memo discussing the proper treatment of common area noncompliance indicating the eligible basis should be reduced for the taxable year in which it occurred rather than the applicable fraction.
The memo also indicates the recapture amount is based on the entire dollar amount placed in eligible basis not just the amount that represents the portion out-of-compliance. In a provided example, the eligible basis contained $50,000 for a laundry room with 20 machines — $40,000 for the construction of the room itself and $10,000 for the 20 machines. During inspection 10 of the 20 machines were discovered to be out of order and therefore in noncompliance. The 10 machines represented $5,000 out of the total $50,000 placed in eligible basis. In the scenario, the noncompliance was not corrected by year end. The IRS deems in the memo that the entire $50,000 must be removed from eligible basis not just the $10,000 representing the portion of the laundry out of compliance.