The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law by the President on March 27, 2020.  This was not the first, and is likely not to be the last, economic stimulus package that will arise from the pandemic.

This particular series is focused on the impact on the real estate industry.  In addition to the stimulus portions of the package as noted above, there were also technical corrections to the law that we feel will have a significant impact to the real estate community.

Below is an outline of the series we will be taking you through over the next several weeks.  We hope you find the information helpful.

Part I: Technical correction of qualified improvement property (QIP) and its impact on cost segregation studies

Part II: Temporary repeal of the net operating loss (NOL) limitation and allowance of NOL carrybacks as well as increase in interest expense limitation

Part III: Forbearance of residential mortgage payments for multifamily properties with federally backed loans and temporary moratorium on eviction filings

Part IV: General real estate topics to consider such as loan and lease modifications and business interruption insurance policies

Part I: Qualified Improvement Property

The Tax Cuts and Jobs Act (TCJA) consolidated the definition of various nonresidential real improvements into a single qualified improvement property classification.

Definition: Qualified Improvement Property is defined as any improvement to an interior portion of a building of a nonresidential real property after the property has been placed in service.  However, the definition excludes enlargements, elevators and structural framework. Those items remain at a 39 year life.

Background: Previously there were 3 different types of nonresidential real improvements that met a specific definition and would qualify as 15 year property eligible for bonus depreciation. While it was clear the intent was for the new QIP to qualify as 15 year property, there was a technical error in the law that required that the new qualified improvement property to be depreciated over 39 years. This “glitch” would turn out to potentially cost the real estate community a significant amount of tax dollars.

Update: Under the CARES Act, there is a technical correction which not only allows QIP to qualify for 15 year depreciation, it also was corrected RETROACTIVELY so taxpayers can amend and claim on 2018 and 2019 returns.

Benefit: This is a great opportunity for real estate investors to analyze the improvements placed in service for both 2018 and 2019.  Often times, the potential reduction in tax savings is worth filing an amended return. Our team is happy to assist you in preparing a cost benefit analysis in order to determine if filing an amended return makes sense for you.

Cost Segregation Studies:

Definition: This study is an analysis that identifies property that can be classified as tangible personal property or qualified improvement property, as opposed to real property. This identification can allow taxpayers to depreciate fixed assets over 5, 7 or 15 years, instead of 27.5 or 39 years.

Benefit: These studies are an exciting planning opportunity due to the Technical Correction we previously discussed, thus allowing 100% bonus depreciation for assets that have a life of less than 20 years. This means assets that ordinarily would be depreciated over 5, 7 or 15 years can be fully expensed in the year it is placed in service (after December 31, 2017 and before January 1, 2026) resulting in lower taxable income and tax liability for you.

As shown below, there is a $360,513 increase in net cash flow by utilizing bonus depreciation on $1,000,000 of qualified improvement property versus depreciating over 39 years.

Visit our COVID-19 Resource page for additional information:

COVID-19 Resources