Depreciation of Foreign Rental Property

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We have another new client coming over from another firm to have her 2020 returns done. In reviewing the 2019 returns, we see that the previous team depreciated her overseas residential rental property on a 40 year basis.

Seems that the old team was referring to Internal Revenue Code section 168(g)(1)(A), which states “In the case of any tangible property which during the taxable year is used predominantly outside the United States the depreciation deduction provided by section 167(a) shall be determined under the alternative depreciation system.”

As the U.S. Supreme Court explained in Martinez v. Lamagno, the term “shall” is permissive when used in statutes passed by Congress absent language further indicating it is compulsory.

Assuming it is subject to the “alternative depreciation system,” under Code section 168(g)(2)(C)(iii), “residential rental property” is depreciable over 30 years; not 40 years.

In Martinez v. Lamagno, the United States Supreme Court, in a 5-4 decision, explained that courts “in virtually every English-speaking jurisdiction have held, by necessity, that shall means may in some contexts, and vice versa.” As such, shall should not be interpreted as being compulsory. The Court further elaborated in finding that “shall and may are frequently treated as synonyms.” Gutierrez de Martinez v. Lamagno, 515 U.S. 417 (1995).

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