Under TCJA, Beneficial Changes to Depreciation Rules for Real Estate Owners

NEW YORK CITY—Stephen Bertonaschi, an FTI Consulting tax expert, highlights some rules that could save real estate businesses money under the Tax Cuts and Jobs Act. As a senior managing director in the firm’s real estate practice, he specializes in advising clients on federal, state and local tax matters.

Bertonaschi says that traditionally the government gave tax breaks including for depreciation as a way to encourage real estate investments. The general idea was that people need to invest substantial money upfront for real estate, later selling it 15 to 20 years in the future. So, the government allowed depreciation to help people start to recover the costs of buying their property, according to Bertonaschi. He reviews the some of the depreciation tax breaks:

With real estate, land does not depreciate. But with developments, there are assets and improvements such as furniture and fixtures. “Once you break those things out there’s a good chunk of assets in your real estate building that would qualify for 100% bonus depreciation,” Bertonaschi explains.

Now under the TCJA, businesses can take 100% of their bonus depreciation in the taxpayer’s first taxable year. It’s a one-time deduction. He points out taxpayers now can take it all upfront instead of in percentages over five years.

Second, taxpayers qualify for 100% bonus depreciation on both used and newly qualified property. Previously, only owners who constructed or purchased new property were eligible for the bonus depreciation. Now, it just needs to be the taxpayer’s first use of the property, even if it is used.

“It’s a big thing for real estate companies because now they buy a building and they carve out shorter-lived assets for a bonus deduction and they’re taking a huge deduction right up front,” says Bertonaschi.

The IRS now also limits the amount of interest expense deduction to 30% of a business’s income. Real estate companies can elect out of the interest expense limitation. However, Bertonaschi says if they do, they’ll need to depreciate their assets over a longer time period, looking at the life of the asset as determined by the IRS.

If companies are operating at a loss, the tax expert says they may limit their interest expense. The limitation can carry forward and in the future the taxpayer may make the election and take all the interest expense deduction at once.

As a final tip, Bertonaschi says the maximum deduction for Section 179 expenses has increased from $500,000 to $1,000,000. “There are some nonstructural components of real estate that qualify for 179 where they wouldn’t qualify for the bonus deduction,” he says.

Section 179 can apply to qualified real property, at the taxpayer’s election. The IRS December 18, 2018 guidance to the TCJA amended the definition of qualified real property to include improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning property; fire protection and alarm systems; and security systems.