By Jeffrey Shea and Patricia Weller, Monroe Moxness Berg
Let’s jump right to the conclusion: the real estate industry is one of the winners under the recently passed Tax Cut and Jobs Act (“Act”). Although the new Act affects many aspects of the Tax Code, this article will focus on three of primary concern to owners and operators of commercial real estate.
Changes to Section 179 of the Tax Code
According to Congress, one of the primary goals behind of the new Act was to stimulate reinvestment by companies into their facilities. The Act seeks to accomplish this by providing generous depreciation treatments and cost recoveries for improvements made to facilities and equipment purchased and placed into service after December 31, 2017.
The Act increases the maximum amount a taxpayer may expense under Section 179 to $1,000,000 and the maximum cost of eligible equipment and improvements (before the phase out threshold) to $2,500,000. If eligible, a company can expense 100% of these costs in the first tax year that they are purchased and placed into service. Property owners and operators should take note that the definition of assets qualifying for Section 179 treatment has been expanded under the terms of the Act to now include items such as roofs, HVAC systems, and fire protection, alarm and security systems.
In addition to the changes to Section 179, bonus depreciation has been enhanced to allow for depreciation of 100% (as opposed to 50%) of the cost of certain eligible assets in the first tax year they are placed into service. This change is for a limited time for eligible assets placed into service after September 27, 2017 through December 31, 2022, after which there is a phase-out period. Another change is to allow bonus depreciation on used equipment where previously used equipment was only a 179 deduction. Bonus depreciation is still only for interior improvements.
To take full advantage of the changes to allowable depreciation under the Act, owners and operators of real property should consider performing a cost segregation study. Such a study will provide a separation of values of personal property and other assets from real estate. This in turn will allow a taxpayer to depreciate personal property and other non-real estate assets for a shorter period (5, 7 or 15 years depending on the asset) than that allowed for real estate (27.5 or 39 year).
It is important to note that a taxpayer can “opt out” of the Section 179 cost recovery and bonus depreciation in the event there is not enough income in the first year to fully utilize the deductions, or if the taxpayer anticipates being in a higher tax bracket in subsequent years and would receive greater value from the depreciation then. If the taxpayer chooses to opt out, then the assets will amortize over the useful life as provided in the Code.
Section 1031 like-kind exchanges are still allowed under the new Act; however, they are limited to real property interests only. Personal property and intangibles are no longer eligible for a Section 1031 like-kind exchange. This affects items such as equipment, vehicles, franchise rights and other items. Still, some of the sting of this change is alleviated by the beneficial depreciation rules described above.
Please note that this article is not meant to give tax advice, but rather to highlight certain provisions of the Act. The Act is in its infancy and we expect technical corrections and modifications when it is codified and state tax responses to the effects of the Act. As always, consult a tax professional to determine how the changes fit your specific circumstances and to keep up with the latest interpretations and modifications to the Act.
Jeffrey Shea and Patricia Weller are attorneys in the real estate practice group at the law firm of Monroe Moxness Berg.