As the Tax Cuts and Jobs Act brings the most sweeping changes in the tax code in over 30 years, the 2018 tax season is going to be a roller coaster ride for many. Tax professionals are scrambling to learn all of the implications for both individuals and businesses as the season gets into full swing.
How this affects you, the commercial real estate investor, and what you should be aware of before making your next real estate purchase, is detailed below. We also rate the tax changes between 2017 and 2018 as Good, Great or Ugly.
Depreciation is beneficial in maximizing a property owner’s tax savings and increasing their cash flow. To allow businesses to recover their property costs more quickly and stimulate the economy, Congress introduced an incentive called bonus depreciation in 2002. This allows owners to deduct an additional percentage of the cost of an eligible property (or property improvement) in the first year the property is placed in service, before their standard depreciation method is applied. However, the IRS has strict definitions of what “personal property” (such as carpeting or wallcovering) or “land improvements” (such as sidewalks or site lighting) can qualify for this bonus. Specific qualifying assets can be identified through an engineering-based cost segregation study.