by Greg Bryant, Managing Partner, Bedford Cost Segregation, LLC
I started my career in commercial real estate in 1976. Things seemed straightforward then, maybe it was because I was young and naïve. For the last 15 years, my firm has been assisting property owners and their tax professionals take advantage of the various incentives related to accelerated depreciation, bonus depreciation and expense treatment of certain improvements made to properties. We strive to understand the changes to Tax Law as they relate to real estate. One thing that is constant is when you get comfortable with the changes to the law and regulations, things change again. I am beginning to wonder if I am getting too old for this line of work!
By way of reference, Congress has passed many laws since 2001 that were intended to promote construction by offering bonus depreciation for any assets that had a tax life of 20 years or less. These items are identified as part of a Cost Segregation Study (CSS) which identifies 39 or 27.5, 15, 7 and 5-year assets. Bonus depreciation has ranged from 30% to 100% but it has always only been available for new, original use property – that is until the Tax Cut and Jobs Act (TCJA) was passed on December 22, 2017. Bonus depreciation is now available to acquired previously owned property at a rate of 100% for these short life assets until 2023 and then phased out 20% per year.
TCJA also eliminated certain designations such as Qualified Leasehold, Retail and Restaurant Improvements – all of which had certain nuances and tax treatments. As an example, Qualified Restaurant Improvements used to enjoy a 15-year tax live (as opposed to 39-year). TCJA has now changed it back to 39-year as of January 1, 2018.
TCJA also created some confusion in that Congress went to great lengths to define or redefine Qualified Improvement Property (QIP) depending on whether you are looking at the tax treatment for Section 179 expense for your trade or business vs. evaluating the same expenditures on a rental property. For some reason best known (or perhaps unknown) to Congress, important language was left out of the QIP description and while the intent was probably to have this become a 15-year asset (which would have been eligible for bonus depreciation) it remains a 39-year asset. The consensus in our industry is that there will need to be a Technical Correction issued but since this is related to Tax Law, it will take a congressional vote to make this change.
“So, this all becomes effective January 1, 2018”? you ask. That would make way too much sense! September 27, 2017 is an important date as it represents when many of the new provisions and rates take effect. If you purchased a used building on September 28th, would you get bonus depreciation? Probably not due to written binding contract rules and other nuances. Construction in progress that spans that date also needs to be evaluated for treatment under the old or new rules.
TCJA also introduced new rules regarding 1031 Exchanges making them solely attributable to Real Estate transactions. On the surface that doesn’t seem like a major deal but consider the impact when the exchanged property contains separately identified personal property. Does this trigger a revenue recognition and taxable event of the personal property? Will the carry-over basis from the exchanged property be reduced by the personal property not eligible for the 1031 treatment? These and other questions continue to surface with no definitive guidance as of yet.
While TCJA’s broadcasted message addressed corporate and personal tax rates, a myriad of other modifications to the Tax Code were made. What is covered in this short article are but a few examples of the “nuances” we are dealing in the midst of what is shaping up as our busiest tax season ever. While the intent of the legislation was to simplify the Tax Code, I would argue that my life has not been simplified!