Virtually all American taxpayers will be impacted by the Tax Cuts and Jobs Act of 2017. Individuals and corporations now look to identify these changes as they plot out their tax compliance and management strategies. For commercial real estate owners and investors, TCJA will have several impacts. Cost segregation studies will play a key role in identifying and substantiating preferred tax treatments.
1. Bonus depreciation
Bonus depreciation of 100% will benefit real estate owners and investors. Before TCJA, bonus depreciation only applied to newly constructed or original use property. TCJA has now introduced the inclusion of property acquired after Sept. 27, 2017, and through 2022 for bonus depreciation. Properties under $1M can also take advantage of this feature. A cost segregation study will establish what costs will qualify for 100% bonus depreciation.
2. Importance of in-service date
For newly constructed property, it is important for owners to know when they entered into a binding contract with a general contractor for construction. Contracts prior to Sept. 27, 2017, will not receive 100% bonus depreciation even if the property is placed in service after Sept. 28, 2017, but they will get a 50% bonus based on the contract date.
3. Increased 179 expenses
Under TCJA, qualifying property includes roofs, HVAC systems, fire protection, alarm systems and security systems. The allowable expense has also increased from $500K to $1M in 2018, and the phase-out deduction increased to $2.5M. This covers tangible personal property acquired for rental properties, furniture and appliances. The increased 179 expenses add another benefit to cost segregation study.
4. Pass-through deduction
With a potential 20% deduction for pass-throughs in play for 2018, the effective federal tax rate drops from 39.6% to 29.6%. CRE professionals may consult a tax adviser to determine whether it makes sense to take advantage of the deduction against a higher rate of tax in 2017.
5. Qualified Improvement Property
There are no longer separate requirements for Qualified Leasehold Improvement Property, Qualified Restaurant Property and Qualified Retail Improvement Property. These separate distinctions were eliminated on Dec. 31, 2017, leaving only Qualified Improvement Property.
6. Tangible Property Regulations
There are significant tax benefits to analyzing improvements made to buildings as TPRs continue to recognize deductions to renovation costs as repair expenses, if applicable.
There will be benefits and trade-offs to consider for commercial real estate owners and investors. Cost segregation studies will help CRE professionals properly evaluate and substantiate preferred tax treatments under TCJA.
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