Real estate owners…are you aware of valuable tax planning and saving strategies available to you? Within the last few years real estate owners have been inundated with tax legislation, including the Tax Cuts and Jobs Act, the CARES Act, tangible property regulations and various other federal and state regulations. The result of all this legislation is tax planning opportunities for Real Estate owners. Here are a few valuable tax-planning and tax-saving strategies

Increased S179 Deduction

The Section 179 deduction allows businesses to immediately expense the cost of qualified property in the year it is placed in service.

The TCJA increased the Section 179 deduction to $1 million and increased the phase-out to $2.5 million. S179 was also expanded to include certain real property expenditures, including HVAC equipment, roofs, fire protection and qualified improvement property. The deduction and phase-out will continue to be indexed for inflation.

Planning Opportunity: Although bonus depreciation does not have a cap on the amount of the deduction, as does S179 noted above, it is worth considering S179 versus bonus depreciation, as S179 is a deduction for state taxes whereas certain states do not allow bonus depreciation deductions.

Additional Benefit of Cost Segregation Studies (CSS)

Cost Segregation is a commonly used strategic tax planning tool that allows real estate owners who have constructed, purchased, expanded, or remodeled any kind of real estate to increase cash flow by accelerating depreciation deductions and deferring federal and state income taxes.

TCJA allows for 100% Bonus deprecation, so land improvements and personal property specifically identified in the cost segregation study would be bonus-eligible and therefore 100% bonus depreciation means immediate expensing in the year of acquisition. In addition, under TCJA, 100% bonus depreciation applies to both new and used property, where previously only new property was eligible for bonus deprecation.

Planning Opportunity: It is never too late to consider a CSS. By having an Estimate of Benefit calculation completed, which essentially is a feasibility calculation carried out based on certain information, such as, date of acquisition, total estimated cost, location of property, square footage and intended use of the property, you are provided with estimates of what the CSS will generate for accelerated depreciation.

Tangible Property Regulations and De Minimis Safe Harbor

We must not forget that the tangible property regulations still exist and have survived all the recent tax laws and changes. Certain changes under the TPR provided an opportunity to write-off the basis of a structural component for the first time. Taxpayers would often depreciate two or three roof improvements, for example, on the same building. The TPR allow for the writing-off of the basis of the old roof, if specifically identified.

In addition, the TPR introduced an immediate expensing opportunity that allows for the expensing of costs under a specific dollar threshold. For taxpayers without AFS (applicable financial statements, that is, audited financial statements) the threshold is $2,500 and for taxpayers with AFS, the threshold is $5,000.

Planning Opportunity: This de minimis safe harbor rule provides an opportunity to expense items that would otherwise be capitalized, and besides accelerating the tax deduction, it eliminates the administrative burden of tracking depreciation.

The CARES Act- QIP

Prior to the CARES Act, qualified improvement property was depreciated over 39 years. The CARES Act provides for a technical correction whereby QIP is correctly depreciated over 15 years as opposed to 39 years. QIP is defined as an improvement to the interior portion of a building that is not structural in nature and placed in service after the date in which the building was placed in service.

Planning Opportunity: Since the QIP is considered 15-year property it is eligible for 100% bonus depreciation.

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