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How Real Estate Depreciation Has Changed under Trump Tax Reform

Congress seriously reformed taxes last year.  The TCJA was enacted on Dec. 22, 2017.

Corporation tax rates were dropped to 21%. Individual rates are mostly higher. That created the problem for pass-through businesses because they are basically both a corporation and an individual taxpayer.

Forbes reports that when your real estate investment depreciation moves into your pass-through corporation and on to your individual taxes, there are some changes to how it will affect your tax situation.

Accelerated Depreciation Changes

The Real Estate Investment Depreciation Deduction has changed under section 168 of the Tax Code.

  • The new code takes effect January 1, 2018. That means that 2017 taxes (filed in 2018) are subject to the old laws.
  • Section 168 outlines the rules covering accelerated depreciation.
  • Section 168(k) allows for some assets to be depreciated completely as a “100% bonus depreciation.”
  • The Journal of Accountancy explains that the changes sound good on the surface, since the depreciation is supposed to increase from 50% to 100%, but somehow some of the assets it applies to have simply disappeared from the code altogether. 
  • The amount of allowable bonus depreciation is then phased down over four years: 80% will be allowed for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
  • The new rule made bonus depreciation apply to both new and used property, plus it extended the time that some other types of property like the plants, live theatrical productions, films, and television can qualify for the total 100% depreciation amount.
  • Originally, the IRS stated the regulations apply to property put into service after or during your tax year, including the final publication date of the regulations in the Federal Register.
  • You are also allowed to rely on these proposed rules for your property that you have put into service after Sept. 27, 2017 if your tax year ends on or later than Sept. 28, 2017.
  • In 2017, there was bonus depreciation allowed on assets with a depreciable life of less than 20 years with the bonus percentage of 50%. The 2018 tax law says that 100% bonus depreciation is available beyond September 27, 2017. That makes the time between September 27 and December 31, 2017 up for debate.
  • The IRS has invited comments on this list proposed changes until October 8, 2018.

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Forbes goes on to report that just recently, the IRS finally published the answer. The Proposed Reg. Section 1.168(k)-2(b)(2)(A)(2) states qualified property for the 100% bonus will include “qualified leasehold improvement property based on the definition before the Tax Cuts and Jobs Act.

Fortunately, the IRS did clean up the other problem at the same time. The issue was that properties purchased, and improved in 2017 wouldn’t qualify for the 100% depreciation bonus because the improvements were not made more than3 years after the property was first put into service. Or was that the problem?

Funding for Real Estate Projects

  • Under the new 2018 tax law, the assets are now depreciated over 39 years, which makes them no longer eligible for the bonus depreciation, which is only for assets with a life under 20 years.
  • In the new tax law, the qualified retail, leasehold, and restaurant improvements are all consolidated into the single class as “qualified improvement property” (QIP).
  • QIP was always supposed to specify a 15 year life so it shouldn’t have been necessary to list anything on the QIP list as being eligible for the bonus, because they should have been automatically.
  • BUT, when Congress revised the Tax Code they consolidated the 4 classes of improvements into QIP they did not specify that QIP has a 15 year life.
  • So, QIP still has a 39 year life, as it did before in the old laws. Now though, QIP is no longer eligible for the depreciation bonus, which is why the 100% looks good on the surface, only.

The new rules will be applicable retroactively for properties that were acquired or put into service after the Sept. 27, 2017 deadline.

Until Congress changes the current situation, QIP will continue to be depreciated as it has been over 39 years and also not be eligible for any bonus depreciation.

If you have any questions in relation to your Investment Depreciation Deductions, send them to us

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA is a Certified Public Accountant, specialized In Tax Planning, International Business, Wealth Management and Offshore Banking. You can email him to fa@fascpaconsultants.com or follow us on Facebook : FAS CPA & Consultants.

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