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Real Estate Journal — Fall Preview — September 27 - October 10, 2019 — 7C
M id A tlantic
C ost S egregation
By Robert Rahner, CFA, ASA, CCSP, Cost Recovery Solutions LLC Tax saving opportunities (and heartaches) in the era of the Tax Cuts and Jobs Act
A
many hoped what’s called the “retail glitch” regarding QIP would be corrected, its final regulations make no changes to the initial language and state that only a legislative change can alter it. Two bipar- tisan bills introduced inMarch that would make a retroactive change have stalled indefi- nitely, so investors continue to be left hanging on to fading hope. Score three steps back . . . Expired Tax Extenders Section 179D of the tax code is a temporary provision enacted in 2005 that had been extended each time it has ex-
pired. It allowed commercial property owners to immedi- ately deduct the cost of install- ing energy-efficient systems or building improvements that reduce energy costs, up to $1.80 per square foot. The 45L tax credit is an incentive for owners of various residential housing units that allowed $2,000 per unit or dwelling meeting high-level energy effi- ciency ratings. However, these valuable investment planning tools have yet to be extended beyond 2017. While lawmak- ers are making a bipartisan push to get these and other
s real estate investors head into their third tax season under the rule of
“tax extenders” reauthorized retroactively by the end of the year, the time has passed for investors to claim the break on their 2018 taxes. All they can do now is hope they are reinstated for 2019 or to file an amended return – IF the bill passes later this year. Score another step back against in- vestors . . . What’s an Investor to Do? To take full advantage of the 100% bonus depreciation incentive as well as offset the pain inflicted by the uncer- tainty and unfulfilled prom- ises of the TCJA and Congress,
investors should consider an- other tax strategy called cost segregation, which can save them thousands or potentially millions. The key component to this incentive is an IRS- approved, engineering-based study that identifies assets in and around a property that can be reclassified and qualify for 5-, 7-, or 15-year deprecia- tion schedules instead of the standard 39-year schedule. Examples of such assets in- clude flooring, accent lighting, dedicated electrical or HVAC systems, sidewalks, retaining continued on page 20C
the Tax Cuts a n d J o b s Act (TCJA), s o m e a r e celebrating i t s e x t e n - sive changes while others continue to hope for tax
Robert Rahner
code corrections and exten- sions that may never come. To help plan for future invest- ments, property owners should take a hard look at where the law has helped and where it still falls short. 100% Bonus Depreciation This tax incentive, which increased from 50% to 100% starting in the 2017 tax sea- son, is the most beneficial change for owners in years. It allows taxpayers to depreciate the full cost of qualifying prop- erty in the year it’s placed into service. Acquisitions as well as new construction projects now qualify for the deduction, which is a game changer for many. Acquisitions are now a more attractive investment option with immediate tax savings. The 100% bonus de- preciation amount remains in effect until January 2023, then phases out with lower rates until ending in 2027. Score one for the TCJA . . . with sig- nificant limitations . . . Qualified Restaurant Property, Qualified Improvement Property (QIP) and Qualified Lease- hold Improvements These are three areas where the TCJA has significant po- tential to hurt investors. Be- fore the TCJA’s enactment, all three enjoyed either a preferred 15-year depreciation schedule, bonus depreciation, or both. However, the TCJA effectively combined all into a single category called QIP. Due to a drafting error, the code as written now states QIP must adhere to a 39-year schedule and is no longer eligible for bonus depreciation. The loss of tax breaks and the resulting increase in af- ter-tax costs for restaurant owners and those making improvements to their spaces has caused many investors to delay or reconsider investment opportunities. This behavior is likely to continue, as the IRS put another nail in the QIP cof- fin just this past week. While
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