Is your current strategy maximising depreciation?

In the past, depreciation has helped property owners and investors save money on taxes. In this article, we’ll talk about how real estate businesses can use depreciation to their advantage and how taxpayers can speed up depreciation.

At the moment, bonus depreciation lets taxpayers write off 100% of the purchase price of qualifying property in the year it is put to use. To qualify, the property must have a recovery period of 20 years or less, be depreciated using the modified accelerated cost recovery system (MACRS), and be put into service between September 27, 2017, and January 1, 2023. For real estate businesses, qualified property is usually, but not always, furniture, fixtures, improvements to the land, flooring, cabinets, and appliances.

Non-residential property owners can get a bonus on qualified improvements to their property (QIP). QIP is defined as property that is an interior improvement made by the taxpayer, put into use after the building was first put into use, and made after December 31, 2017. It doesn’t include elevators, escalators, the building’s internal structure, or improvements related to its expansion.

Over the next few tax years, bonus depreciation will be slowly phased out. Any qualifying assets put into use on or after January 1, 2023, will only be eligible for bonus depreciation equal to 80% of the purchase price. This will keep going down by 20% every year until assets put into service on or after January 1, 2027, no longer get bonus depreciation.

Section 179 deductions

Under Section 179 of the Internal Revenue Code (IRC), eligible taxpayers can choose to write off the cost of qualifying property up to a certain amount. Property must be bought for use in a trade or business for it to be eligible. This deduction can be used to pay for things like furniture, fixtures, and carpets. The cost of “qualified real property” is also eligible for real estate businesses. This includes qualified improvement property as well as roofs, HVAC, fire protection and alarm systems, and security systems that were added to nonresidential real property after it was first put into service. Land improvements are not eligible.

Aside from dollar limits, this deduction may not be available to all owners or investors. Before choosing to use IRC 179, it’s important to look over these restrictions.

Studies on cost segregation

Cost segregation studies are a powerful way to speed up depreciation for real estate businesses. A cost segregation study finds and measures the different parts of both bought and built assets. With this number, businesses can depreciate parts of their buildings that have shorter lives. Businesses can take bonus depreciation on the separated building parts if the assets are eligible.

Rules for things you can touch

The “repair regulations” for tangible property are often overlooked and underused by real estate businesses. Before the repair regulations were put in place, taxpayers had to capitalise the cost of any asset with a useful life of more than one year and depreciate the cost over the asset’s useful life. There wasn’t a clear definition of what a repair was, so taxpayers put improvements on their balance sheets that they can now write off. When the repair regulations came out in 2014, they told taxpayers what kinds of improvements could be considered repairs and deducted in the same year they were made. This allowed taxpayers to deduct major improvements.

Conclusion
This talk goes over a lot of high-level things that real estate businesses should think about when planning how to get the most depreciation. Businesses need to carefully plan their future projects to make sure that depreciation is used in the best way possible.