Revenue ruling · 1966
Rev. Rul. 66-111
Rev. Rul. 66-111, 1966-1 C.B. 46
IRS revenue ruling
Audio summary
A short audio walkthrough of this rule: what it says and why it matters for your study.
What it holds
When a used building is acquired for a lump sum, the buyer must use one composite useful life for the whole building. Basis cannot be allocated to separate component accounts for depreciation purposes. Original builders and owners could still use component depreciation, but buyers of used buildings were limited to a single life.
Why it matters for your study: This is the pre-ACRS rule that component depreciation was not available to buyers of used buildings. Rev. Rul. 73-410 later created an exception through qualified appraiser allocation. Understanding this ruling explains why a proper appraisal-based study on acquired property is so important, the requirement traces back to the baseline rule this ruling imposed.
Where this comes from
Before MACRS and the modern cost segregation era, depreciation was based on useful lives estimated for each asset. Original builders could assign different useful lives to different building components, speeding up write-offs for parts that wore out faster.
Buyers of used buildings were in a different position. The IRS took the view that when you buy a building for a lump sum, you cannot reliably separate the price into individual components. Revenue Ruling 66-111, issued in 1966, formalized that limit.
What it established
The ruling said that when you buy a used building for a lump sum, you must use one composite useful life for the whole building. You cannot allocate the purchase price to separate component accounts and depreciate each component on its own schedule.
Original builders had more flexibility. They knew exactly how much each part of the building cost, so component-by-component depreciation made sense for them. But a buyer paying one price for a whole property was treated differently.
Rev. Rul. 66-111 created the gap that Rev. Rul. 73-410 (1973) later addressed by allowing a qualified appraiser to do the allocation that the lump-sum purchase did not.
How it shows up in a study
This ruling is part of the historical record that explains the legal foundation for a proper allocation on acquired property. When you buy a building and want to do a cost segregation study, the study has to do the work the original purchase did not do: allocate the acquisition cost among the components.
That requirement traces back to the baseline this ruling established. Rev. Rul. 73-410 created the exception, but the exception only makes sense in the context of the rule.
What it does not mean
This ruling is largely superseded in practical terms. MACRS replaced the old useful-life system in 1981, and the HCA decision and subsequent rulings have confirmed that component-level classification is valid for acquired property under modern law.
Rev. Rul. 66-111 is history, but useful history. It explains why the requirement for a proper professional allocation of purchase price is not a modern invention. That requirement was in the law from the beginning.
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.