Real Estate Owners - All You Need to Know About the Depreciation Rules Under TCJA

Rental real estate owners and operators can use tax depreciation to reduce (if not eliminate) taxable income, while still generating positive cash flow. Senior Managing Director Stephen Bertonaschi authored an in-depth article for the Fall 2019 issue of The Real Estate Finance Journal, a Thomson Reuters quarterly, about the tax depreciation rules and changes under the Tax Cuts and Jobs Act of 2017. Specifically, the article examines such issues as Bonus Depreciation, Deduction of Business Interest, Qualified Improvement Property. Net Operating Losses and Depreciable Business Assets.

This is an extract from The Real Estate Finance Journal, Fall 2019 issue. The whole publication is available at https://legal.thomsonreuters.com

"The TCJA changed bonus depreciation from 50 percent to 100 percent for qualified property. Qualified property is defined in Internal Revenue Code (“IRC”) § 168(k) as assets which have a recover period of 20 years or less. While non-residential buildings have a depreciable life of 39 years and residential buildings have a depreciable life of 27.5 years, each of these types of buildings may have several components that could be broken out into shorter lived assets. The percentage of a building that is represented by such assets will vary greatly depending upon the type of asset. For example, a state-of-the-art Class A office building may yield a much larger amount of qualified property than a no thrills industrial building.

Doubling bonus depreciation is in and of itself a very taxpayer friendly change; however together with the TCJA change to allow bonus depreciation on both used and new qualified property, it is a bit of a game changer. Previously, only owners and investors who constructed or purchased new property were able to benefit from bonus depreciation. Now, a taxpayer could purchase a 30-year-old office building and conceivably break out the purchase price to include a large amount of qualified property that would be eligible for 100 percent bonus depreciation. This certainly does not rise to the level of depreciating an entire building immediately as was seen in previous proposals, but there is still a great benefit to taxpayers made by this change. Ultimately, taxpayers will most likely see this as an opportunity to perform more cost segregation studies on their acquisitions."

© 2019 Thomson Reuters. Originally appeared in the Fall 2019 issue of Real Estate Finance Journal. For more information on that publication, please visit legal.thomsonreuters.com. Reprinted with permission.