For real estate owners, there is one surefire boon from the Tax Cuts and Job Act last year: bonus depreciation.
Under the prior law, there was a 50% bonus depreciation for property placed in service in 2017, 40% for 2018, and 30% for 2019. Qualified property has to be new, not used.
Under the new law, there is 100% bonus depreciation for property placed in service after Sept. 27, 2017, and before 2023, 80% for 2023, 60% for 2024, 40% for 2025 and 20% for 2026. The acquisition date for property purchased with a written contract is the date of the contract.
Qualified property includes property acquired by purchase if a taxpayer has not previously used the property, so the property does not have to be new, as long as it isn’t acquired from a related party. A qualified property doesn’t include property used in a business that isn’t subject to the net business interest expense limitation (see below), but it does include property used in farm business.
The law also adds a new category for qualified film, TV and live theatrical production property. Taxpayers were able to elect a 50% bonus for 2017.
Section 179 expensing has also increased to include alarm, HVAC and security systems; fire protection, roofs; and HVAC systems, with the allowable expense increased from $500,000 to $1 million in 2018, and the phase-out deduction increased to $2.5 million. These rules include tangible personal property acquired for rental properties, furniture and appliances.
Potential losses of prior credits include:
- Interest deduction limitation. Interest is now limited to 30% of a business’s adjusted taxable income, with the exception of businesses with average annual gross receipts of $25 million or less. Real property businesses can opt out of the interest limitation if they elect the alternative depreciation system recovery period rather than the modified accelerated cost recovery system. ADS recovery periods are 40 years for nonresidential property, 30 years for residential and 20 years for improvement property.
- State and local tax and property tax deduction. The exclusion of local income and sales tax deductions is for non-corporate taxpayers. There is also a $10,000 limit for the deductibility of property tax that applies to individuals, not businesses.
- Net operation loss limitation. Under the prior law up to $500,000 could be deducted. The limit would be reduced dollar-for-dollar if $2 million in property was placed in service during the year. Under the new law, $1 million could be deducted starting in 2018. The limit is reduced dollar-for-dollar if $2.5 million in property is placed in service during the year. The new law also adds tangible property used for lodging (beds and other furniture for apartments and hotels) and an election for alarm, fire protection and security systems; HVAC property; and roofs for nonresidential real property placed in service after the date the real estate was first placed in service. The provisions are effective for property placed in service in 2018.
All things considered, the tax law provides significant tax savings for the majority of businesses given an overall reduction of tax rates and increased bonus and Section 179 deductions. Real estate owners should seriously consider projected revenue, tax liability and the application of accelerated depreciation to take advantage of these increased expenses on all acquisitions.
