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Volume 5 - Opinions of Counsel SBEA No. 30

Opinions of Counsel index

Aged exemption (income requirement) (net rental income) (depreciation) - Real Property Tax Law, § 467:

Depreciation, whether of real or personal property, is not a deductible item for purposes of determining net rental income under section 467 of the Real Property Tax Law. However, the ordinary and necessary expenses of producing the rental income are deductible for such purposes.

We have been asked whether depreciation of personal property is a permissible deduction in determining “net rental income” for purposes of the so-called “aged exemption” (Real Property Tax Law, § 467).

The Court of Appeals has stated quite clearly that depreciation per se is not a permissible deduction in determining net rental income for purposes of this exemption (Engle v. Talarico, 33 N.Y.2d 237, 306 N.E.2d 796, 351 N.Y.S.2d 677). In its decision, the Court drew no distinction between depreciation of real property and depreciation of personal property and we can see no reason for drawing such distinction. The Court’s reasoning was as follows:

Depreciation for accounting, economics, and purposes of income taxation is a theoretical calculation to accumulate a hypothetical fund to replace the capital asset producing the income. There may or may not be a real depreciation reserve fund. Depreciation may or may not be offset by capital appreciation, whether or not realized. In any event, none of these purposes may be relevant to the purpose of section 467 in measuring the “income” of the elderly, particularly since, other things being equal as the economists say, theoretical depreciation (as distinguished from physical depreciation or deterioration) may not reflect any lessening of income over the theoretical life of the income-producing asset. There is an additional difficulty. There are so many widely different ways of computing depreciation for economics, accounting and income taxing purposes, that no easy standard lies at end.

Moreover, it might be noted that as early as September, 1967, the State Board of Equalization and Assessment issued an opinion letter stating that depreciation was not deductible from net rental income for purposes of the section 467 exemption. Most of the municipal assessors apparently followed this advice. Where the practical construction of a statute is well known, the Legislature is charged with knowledge and its failure to interfere indicates acquiescence (RKO-Keith-Orpheum Theaters v. City of New York, 308 N.Y. 493, 127, N.E.2d 284). That the Legislature has since failed to redefine “net rental income” to allow deduction of depreciation is some additional evidence of its intention.
(33 N.Y.2d, at 241-242, 351 N.Y.S.2d, at 680-681).

Thus, pursuant to the foregoing decision, depreciation may not be deducted from “net rental income” for purposes of section 467, whether such depreciation is attributed to real property or personal property.

However, certain items are deductible from “net rental income” for purposes of this exemption. These are the ordinary and necessary expenses (which include utility and tax expenditures) actually paid out by the applicant during the income reporting period (see, 1 Op.Counsel SBEA No. 8). Thus, if an applicant for this exemption finds that it is necessary to purchase personal property (such as a refrigerator or stove) for an apartment he or she is leasing to another, payment for such item(s) would be considered an “ordinary and necessary expense” of producing the rental income (in the years in which such payments are made) and therefore would be deductible in order to determine net rental income under section 467. However, pursuant to Engle v. Talarico, supra, depreciation of such items in subsequent years would not be deductible.

July 3, 1975

NOTE:  Codified L.1975, c.535.