Real estate: Shifting bonus depreciation rules


By Jay Garcia, CPA

In an era marked by fluctuating interest rates, soaring material costs, and economic uncertainties, the real estate industry finds itself navigating treacherous waters. Developers, investors, and property owners are confronted with a landscape brimming with challenges. Many in the industry are witnessing eroding profit margins while others are being forced to exit the market altogether.

Changing depreciation rules

Adding yet another obstacle to the industry are changes to tax rules related to depreciation, Depreciation rules change regularly, so it is critical that industry professionals and their tax teams take a proactive approach to ensure compliance and maximize tax benefits.which in the past several years have played a huge role in easing the tax burdens of real estate professionals. Now, more than ever, is it necessary to collaborate with experienced tax professionals to navigate through changes in tax law and implement strategic tax planning.

Depreciation is not a new concept to real estate professionals. Historically, tax law has allowed for the gradual allocation of the cost of an asset to be taken as an ordinary deduction over its useful life.  IRS guidelines assign useful lives to different classes of assets and also set varying depreciation rules to different classes of assets.

Depreciation rules change regularly, so it is critical that industry professionals and their tax teams take a proactive approach to ensure compliance and maximize tax benefits.

Tax Cuts and Jobs Act

One of the most impactful developments in depreciation rules took place with the Tax Cuts and Jobs Act (TCJA) of 2017. One of the key provisions of the TCJA was the expansion of bonus depreciation, allowing businesses to immediately deduct 100 percent of the cost of qualifying assets placed in service after September 27, 2017.

This enhancement represented a substantial departure from previous tax laws, which offered more limited bonus depreciation allowances. Not only did the expansion of bonus depreciation benefit taxpayers with more immediate tax benefits from the purchase of fixed assets, but it also took away many of the complexities of tax planning and forecasting.

Unfortunately, all good things come to an end. The expansion of bonus depreciation under the TCJA had a huge positive impact on taxpayers, but also included in the Act were provisions to gradually decrease and eventually phase out bonus depreciation over time.

Beginning January 1, 2023, bonus depreciation allowed on the purchase of qualifying assets is reduced to 80 percent instead of 100 percent. The bonus depreciation allowance will continue to decrease by 20 percentage points each year until completely phased out January 1, 2027 and beyond.

These reduced allowances are still more beneficial than those available before the TCJA, but they add more complexity to business and tax planning strategies.

Given these changes, it may be time to pivot to other options. In addition to bonus depreciation, real estate professionals can leverage Section 179 deductions to optimize their taxIn addition to bonus depreciation, real estate professionals can leverage Section 179 deductions to optimize their tax liabilities. Section 179 allows businesses to deduct the full purchase price of qualifying assets in the year of purchase. liabilities. Section 179 allows businesses to deduct the full purchase price of qualifying assets in the year of purchase. Although this sounds very similar to 100 percent bonus depreciation, various limitations and eligibility requirements differentiate this allowance.

One limiting factor of Section 179 was that it had traditionally been associated with tangible personal property and not real property (buildings and improvements). However, a recent tax provision expanded the applicability of Section 179 to certain improvements made to nonresidential real property classified as Qualified Real Property (ex. roofs, heating and air conditioning systems, and fire protection systems) and Qualified Improvement Property (ex. improvements made to the interior of nonresidential buildings after the building is placed in service).

The challenges facing the real estate industry demand a proactive and creative approach to navigate through uncertainty. With every challenge comes an opportunity for growth. Real estate professionals that are able to adapt and shift strategies will be able to work through the current market climate and many will flourish.

Leveraging the experience of experienced tax professionals can ensure compliance with ever-changing tax provisions as well as maximization of tax savings opportunities.

The tax professionals at Sol Schwartz & Associates have worked extensively with commercial real estate owners since our firm was founded in 1980. Let us know if you would like a real estate CPA to take a look at your situation. Just leave your contact information below and we will get back to you promptly.