In our earlier installment about How Tax Reform Affects Owners of Commercial Real Estate, we covered some of the basic changes to tax law brought about by the Tax Cuts and Jobs Act (TCJA), which is the most extensive piece of tax legislation in over 30 years. This article will present some tax planning opportunities that have been enhanced by this important tax reform.
Qualified Improvement Property is a new class of fixed assets defined by TCJA as interior improvements to a non-residential building placed in-service after the date the building was first placed in-service. Also, this cannot include elevators, escalators or the interior structural framework of the building. There is some lack of clarity on the provision regarding qualified improvement property. Underlying conference committee discussions indicates that Congress intended for qualified improvement property to have a 15-year recovery period. This would mean that the property would be eligible for 100% bonus depreciation. However, the actual text of the law does not explicitly state that a 15-year life applies, so we anxiously await clarification on that issue.
Assuming qualified improvement property will be subject to a 15-year depreciation period and will be subject to 100% bonus depreciation, what does that mean in practical terms? If a taxpayer purchases a pre-owned building, most of the modifications to the interior of the building will be qualified improvement property. This could make a “fixer-upper” a more attractive option than building from the ground up. Of course, there are many other considerations besides income taxes, but this benefit certainly can “sweeten the pot.”
We will definitely need to keep an eye out for any clarifications to this law to make sure our assumptions hold true, but it appears that there will be tax advantages to renovating vs. building new. Future installments will address any changes or clarifications to the treatment of qualified improvement property.
John R. McCallum, CPA
John R. McCallum is a member with GranthamPoole PLLC and a recognized leader in the field of cost segregation and various real estate taxation matters. He has also written, taught, and spoken on many topics in the area over the years. Please contact John at jmccallum@granthampoole.com, www.linkedin.com/in/john-mccallum, or 601-499-2400. CPA License # 5323
The above does not represent tax advice. Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.