The Tax Cuts and Jobs Act (TCJA) that Congress passed in December has many individuals and business owners still looking for answers. Two things that are certain for real estate owners is that changes to bonus depreciation allowances and the Section 179 deduction will have a big impact on business.

Highlights of the TCJA for real estate owners

Bonus depreciation- The act stipulates that 100% of a qualified property’s value is eligible for the bonus depreciation allowance. Under prior law, there was a 50 percent bonus depreciation for property placed in service in 2017, 40 percent for 2018, and 30 percent for 2019. The new 100 percent bonus depreciation will be assessed on qualified property placed in service after Sept. 27, 2017, and before 2023. In 2023 the allowance will be 80 percent, 60 percent for 2024, 40 percent for 2025 and 20 percent for 2026.

What counts as ‘qualified’ property?

The allowance applies to qualified property only, meaning new and not used property.

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’s not acquired from a related party, and
• Property used in farm business.

Qualified property does not include...

• Property used in a business that is not subject to the net business interest expense limitation.

The law also adds a new category for qualified film, TV, and live theatrical production property. Taxpayers can elect a 50 percent bonus for 2017.

Section 179 expensing has also increased to include...

• Roofs, HVAC systems, fire protection, alarm systems and security systems.

The allowable expense has increased from $500,000 to $1,000,000 in 2018, and the phase-out deduction has increased to $2.5 million. Tangible personal property acquired for rental properties, furniture and appliances is now included in the rules.

Potential losses of prior credits include:

• Interest deduction limitation: Interest is now limited to 30 percent of a business’ adjusted taxable income, with the exception of businesses with average annual gross receipts of $25 million or less.
• State and local tax and property tax deduction: Non-corporate taxpayers can exclude up to $10,000 of local income and sales tax deductions.
• Property placed in service: Under the new law, you can deduct up to $1 million on property placed in service, starting in 2018. Prior law held that you could deduct up to $500,000. The limit would be reduced dollar-for-dollar if $2 million in property was placed in service during the year. The new limit is reduced dollar-for-dollar if $2.5 million in property is placed in service during the year.

Overall, the TCJA will provide significant tax savings for the majority of businesses given the increased Bonus and Section 179 deductions and overall reduction of tax rates. Real estate owners should seriously consider three things as they move forward- projected revenue, tax liability and the application of accelerated depreciation. This will help you to capitalize on increased expenses on all acquisitions.

Questions? Contact our Tax Services Team for more information.