Three valuable depreciation-related breaks may be available to real estate investors:
1. Bonus depreciation
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.
2. Section 179 Expensing Election
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.)
3. Accelerated Depreciation
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.)
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