Looking Forward to 2023: A Recap of 2022 for Commercial Real Estate

Looking Forward to 2023: A Recap of 2022 for Commercial Real Estate

With 2023 officially in full swing, we thought it would be helpful to look back at 2022’s trends, such as optimizing real estate through cost segregation studies and property valuation. While living in times of increasing interest rates and high inflation, we presented a variety of strategies that investors may still want to consider when looking at ways to save money in 2023. Let’s review them.

Bonus Depreciation, Then and Now

While 2022 marked the last chance to take advantage of the 100% real estate bonus depreciation, The Inflation Reduction Act (IRA) also introduced a higher energy tax deduction, making going green a more lucrative option.

The Tax Cut and Jobs Act of 2017 increased the first-year bonus depreciation from 50% to 100%, and that amount was available through the 2022 tax year. However, this percentage is now reduced to 80% for 2023, 60% in 2024 and so on until it is eliminated by 2027 (unless Congress changes it).

Bonus depreciation is a tax incentive that allows taxpayers to deduct a larger percentage of the cost of qualifying property in the year it is placed in service. It can be used for capital improvements as long as the modification is new, has a useful life of 20 years or less and was not purchased from a related party. If you need to make property improvements or other purchases, getting them in service sooner rather than later will still allow you to take advantage of bonus depreciation to expense up to 80% of the cost.

Considering a Cost Segregation Study

Moving into 2023, it’s still a great time to consider a cost segregation or lookback study to see if your property qualifies for any tax benefits, even after a project or purchase is complete. As CFOs and other C-suite leaders reflect on what they’ve accomplished and what still needs to be done, it’s important to consider whether your commercial property qualifies for or would benefit from a cost segregation study.

A cost segregation study is a detailed analysis of the costs associated with purchasing, constructing or renovating commercial real estate. It can help identify improvements that can be deducted immediately (via bonus depreciation) and those that must be depreciated over the default 39-year timeline for commercial real estate.

Even if you invested in a building a few years ago but allocated 100% of the cost to real property with a 39-year recovery period, you may still have time to break out some expenses from the total purchase, or project cost and depreciate them over a shorter period.

A cost segregation lookback study involves a detailed review of cost capitalizations on prior acquisitions, construction and renovations. Once the analysis identifies all the construction-related costs that can be depreciated over five, seven or 15 years, it's easy to claim missed depreciation on those assets (and claim significant tax refunds) without amending prior tax returns.

Leveraging the Energy Tax Deduction

The buildings sector in the U.S. has long been one of the most challenging regarding climate action, but property owners have struggled to secure funding for upgrades that would improve energy efficiency and reduce emissions. However, the recent passage of the IRA includes provisions that could significantly boost climate actions in the building sector.

Signed into law in August 2022, the IRA now features numerous tax incentives for renewable energy and clean energy investments. One of those incentives was a significant change to the Commercial Buildings Energy-Efficiency Tax Deduction (Section 179D), which incentivizes builders and building designers to create energy-efficient commercial buildings.

The 179D tax deduction has been in effect since January 1, 2006 for the purpose of helping businesses reduce their tax burden while also making energy-efficient investments and the incentive was recently made permanent by the Consolidated Appropriations Act. The newly implemented changes from the IRA increase eligibility for larger deductions and now make the tax credit available to a wider range of taxpayers looking to decrease their carbon footprints. Those changes include:

  • Increasing the maximum tax deduction from $1.88 in 2022 to $5.00 per square foot in 2023
  • Lowering the required minimum savings in total annual energy and power costs from 50% to a 25% reduction
  • Allowing buildings to qualify for a partial deduction of $0.60 per square foot for the efficiency of each lighting, HVAC and building envelope[RL1]
  • Allowing a higher deduction for taxpayers that meet prevailing wage and apprenticeship requirements
  • Allowing tax-exempt entities to assign the deduction to the architect, engineer or contractor that performs design-build services for government-owned buildings
  • Removing the lifetime limit, allowing the 179D deduction to be taken every three tax years, four in some situations. Previously, the deduction was permitted only once over the life of the building.

These changes to 179D allow commercial real estate owners to accelerate deductions for the costs of building and improvements, providing immediate cash flow relief.

Considering the Future of Office Space

The pandemic changed the way companies and employees think about their work environment, creating viable options for flexible and hybrid work models. Now, as more employees return to in-person work, companies are applying what they’ve learned to reimagine their physical office space. Commercial real estate expert Eric Galanti, Senior Vice President at CBIZ Gibraltar Real Estate Services, shared his insights on evolving office space trends from 2022.

As companies define their future work models, employee expectations are a key consideration. For most employers, it’s still a candidate’s market. To attract and retain top talent, companies are looking closely at what employees want and how they can provide the right combination of in-person collaboration and remote flexibility. Optimizing the company’s physical office locations is crucial.

We’re also seeing companies reimagining the purpose of their offices. They’re looking to create offices that function as a hub for collaboration and foster productivity. At the same time, it needs to be a place that employees value and want to come to on a regular basis. Overall, employers are looking for their office spaces to create more interaction. As offices become hubs for creativity and interaction, a lot of companies are shifting to higher quality buildings, especially when they downsize to occupy a little less space. Higher quality buildings offer more amenities, like fitness centers, tenant lounges, food halls and golf simulators.

Looking forward, we expect the tenant-friendly market to continue into 2023 as companies adapt their office spaces to their post-pandemic needs.

Next Steps

Implementing innovative solutions and benefits (like bonus depreciation, a cost segregation or lookback study, or the Commercial Buildings Energy-Efficiency Tax Deduction) can help your business navigate the recessionary concerns of 2023 and enable your company to thrive. If you don’t know where to start, our dedicated commercial real estate team at CBIZ can help.

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Looking Forward to 2023: A Recap of 2022 for Commercial Real Estatehttps://www.cbiz.com/Portals/0/Images/CRE-January-Article-2023.jpg?ver=CxVfk_LYRaOt17aYpajCbQ%3d%3dWith 2023 officially in full swing, we thought it would be helpful to look back at 2022’s trends, such as optimizing real estate through cost segregation studies and property valuation.2023-01-19T17:00:00-05:00With 2023 officially in full swing, we thought it would be helpful to look back at 2022’s trends, such as optimizing real estate through cost segregation studies and property valuation.Planning & Tax MinimizationReal EstateYes