Hit the Trifecta: How Commercial Real Estate Wins Big with Cost Segregation, Tangible Property Regulations & Bonus Depreciation
Commercial real estate developers are in a prime time to save money on their tax bills. The tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA) enhanced the bonus depreciation percentage to 100% for qualifying materials placed in service from Sept. 28, 2017 through Dec. 31, 2022.
To take full advantage of the bonus depreciation provision – while it’s at its 100% mark – many developers may want to take a closer look at the new and new-to-them property that they have accumulated since Sept. 28, 2017 and potentially plan for future acquisitions. Bonus depreciation, combined with other tax deductions, gives real estate developers a unique opportunity to maximize their tax savings before Dec. 31, 2022.
What Are the Opportunities Available Right Now?
The tax reform law’s enhancement of the bonus depreciation deduction created more of an incentive for businesses of all types to make investments in business property. The deduction may be particularly beneficial for real estate developers. TCJA didn’t just prolong the bonus depreciation deduction (which was set to drop from 50% in 2017 to 40% before the law change), it expanded the deduction to benefit used property as well. This is particularly important for real estate developers who are undergoing acquisitions. When the property is new to your company, there is a potential opportunity to capture tax savings on that property and its various assets.
Property eligible for bonus depreciation includes placed-in-service assets with depreciable lives of 20 years or less. Whether qualified improvement property would fall into this category, however, remains to be seen.
Don’t Forget the TPRs
Real estate developers face another opportunity for potential tax savings when they consider the tangible property regulations (TPRs). Revised TPRs went into effect in 2014 and created more potential for developers to deduct repairs, materials and supplies, and routine building maintenance. The TPRs also affected certain dispositions, particularly of Modified Accelerated Cost Recovery System (MACRS) property.
TCJA did not affect the application of TPRs. Taxpayers will still use the TPRs to analyze each unit of property placed in service to determine whether the property should be capitalized or expensed. Under the regulations, certain types of repairs can be expensed and deducted rather than capitalized over a period of time. Additionally, the materials being replaced by the repairs may qualify as a partial asset disposition (PAD). Qualifying PADs allow the taxpayer to take a write-off for the undepreciated cost basis of the replaced property so long as they capitalize the replacement property.
Cost Segregation as the Key to Cost Savings
So how can real estate developers make the most out of their bonus depreciation deduction and optimize the tax treatment of their repairs? Cost segregation. A cost segregation study analyzes all of a taxpayer’s tangible assets and classifies them into their appropriate depreciable lives. From there, a taxpayer can more easily determine whether certain elements of property qualify for the bonus depreciation deduction. A cost segregation study also makes applying the tangible property regulations easier.
A cost segregation study can be undertaken any time property is being brought into the business – whether through a new development project, major renovation or acquisition. It can also be used when a real estate developer has owned property for less than 10 years and has not previously undertaken a cost segregation study for that property. The so-called “look-back study” can be particularly good for capturing property that may have been placed in service after Sept. 28, 2017, which could be eligible for the 100% bonus depreciation deduction.
Real estate developers that work in the multi-family sector are good candidates for cost segregation and potentially bonus depreciation, as well as the tangible property regulations due to the potential for major renovations. Office spaces are also good candidates.
Given where we are in the year, timing will be critical if you want to capture all of your tax benefits in 2019. Cost segregation studies are best undertaken before the end of the year so there is still time to identify the potential for bonus depreciation and tangible property regulation benefits before your business’ 2019 tax return is filed.
Should you have any questions or require additional information, don’t hesitate to reach out to the author of this article, Larry Rosenblum (firstname.lastname@example.org or 561.922.3006). For all other inquiries, please contact us.