Three valuable depreciation-related breaks may be available to real estate investors:
This additional first-year depreciation is available for qualified assets, which before the TCJA included qualified improvement property. But due to a drafting error in the TCJA, qualified improvement property will be eligible for bonus depreciation only if a technical correction is issued. (Check with us for the latest information.)
When available, bonus depreciation is increased to 100% (up from 50%) for qualified property placed in service through Dec. 31, 2022. For 2023 through 2026, bonus depreciation is scheduled to be gradually reduced.
Warning: Under the TCJA, real estate businesses that elect to deduct 100% of their business interest are ineligible for bonus depreciation.
This allows you to deduct (rather than depreciate over a number of years) qualified improvement property—a definition expanded by the TCJA from leasehold-improvement, restaurant and retail-improvement property. The TCJA also allows Sec. 179 expensing for certain depreciable tangible personal property used predominantly to furnish lodging and for the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.
For qualifying property placed in service in 2019, the expensing limit is $1.02 million. The break begins to phase out dollar-for-dollar when asset acquisitions for the year exceed $2.55 million. (These amounts are adjusted annually for inflation.)
This break allows a shortened recovery period of 15 years—rather than 39 years—for “qualified improvement property.” This is a much broader property category than the one the break applied to before the TCJA. However, due to a drafting error in the TCJA, 15-year depreciation won’t be available unless a technical correction is issued. (Check with us for the latest information.)
E. Cohen delivers timely industry updates, news analysis and expert commentary in our monthly newsletters for General Business Entities, Government Contractors, Nonprofit Organizations, Real Estate Firms, High Net Worth Individuals, and Companies receiving our Business Technology Services.