Revenue ruling · 2002
Rev. Rul. 2002-9 (Impact Fees)
2002-1 C.B. 614
IRS revenue ruling
The facts
IRS revenue ruling on one-time impact fees a developer paid a county as a condition of the construction permit for a new residential rental building. The fees were calculated from the planned building's size and unit count and were generally refundable if the building was not built as planned.
What it holds
Impact fees incurred in connection with the construction of a new residential rental building are capitalized costs allocable to the building under sections 263(a) and 263A (indirect costs of production), not allocable to the land. The fees are then depreciated under section 168 as part of the building beginning when the building is placed in service. Conforming changes are method changes under sections 446 and 481.
Why it matters for your study: It settles where impact fees land in a cost detail. They go into the building's depreciable basis, not into land and not into short-life buckets. That matters because building cost can be depreciated and land cost cannot.
Background
When a developer builds, the county often charges impact fees to help fund roads, schools, and services the new project will use. In the ruling's facts, a developer paid one-time impact fees to a county as a condition of the construction permit for a new residential rental building.
The fees were calculated from the planned building's size and unit count, and they were generally refundable if the building was not built as planned. The open question was where those dollars land: in land basis, in building basis, or somewhere else. The answer decides whether they ever produce a deduction.
What it established
The IRS held the impact fees are capitalized costs allocable to the building, not to the land. The legal hooks are section 263(a), which requires capitalizing costs of acquiring or producing property, and section 263A, which sweeps in indirect costs of production. The fee was tied to the building itself: its size and unit count drove the amount, and the fee came back if the building was not built.
Once in the building's basis, the fees are depreciated under section 168 as part of the building, beginning when the building is placed in service. And a taxpayer who handled them differently makes a conforming change under sections 446 and 481, the method change framework.
How it shows up in a study
A cost segregation study starts from the property's depreciable basis, so getting the basis build right comes before any reclassification. This ruling is the authority for putting impact fees into the building's depreciable base instead of stranding them in land, where they would never be recovered.
In the cost detail, that means impact fees ride with the residential or commercial building bucket. They grow the total that depreciates. The ruling sits in the workpapers behind the basis summary, and it is a clean answer if an examiner asks why permit-related fees are being depreciated at all.
What it does not mean
The ruling does not move impact fees into 5, 7, or 15-year buckets. They are part of the building, so they recover over the building's life. A study that spreads impact fees across short-life assets is going beyond what the ruling says.
It also does not cover every government charge. The ruling addressed one-time impact fees tied to constructing a new residential rental building, with amounts driven by the building itself. A charge tied to the land or to entitlements, rather than to producing the building, needs its own analysis.
Primary source
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This page explains a tax authority in plain words. It is not tax advice for your situation. The way this authority applies to your property is reviewed by a licensed tax professional. Citation is provided so you or your advisor can read the primary source.