At the end of 2017, the current administration signed off on the largest tax reform initiative in over 30 years, naming it the Tax Cuts and Jobs Act (TCJA). While this initiative has many favorable elements, many people have also started to notice that the bill either limits or entirely eliminates some of the tax breaks they have become accustomed to receiving over the last 30 years, leading to an immediate change in peoples’ rebates and fees. This law has also greatly impacted the world of real estate, for better or for worse.
Under these new tax laws, the TCJA has completely altered the federal income tax depreciation rules and limitations for depreciating and expensing property. Individuals and businesses now have the option to immediately deduct qualifying properties as a deductible expense, rather than have them capitalized and depreciated. This applies to any property that falls under the guidelines of Section 179, including new inclusions such as interior home improvement properties and venues housing productions in film, television and live theater. The changes have also increased the maximum deduction amount from $510,000 to $1 million.
There is also good news for lodging landowners. In order for a piece of property to fall under the category of lodging, there must be sleeping accommodations provided and rented out for monetary gain. This could mean a hotel, motel, rental condominium, apartment, single-family residence, or dormitory. For any of these types of establishments less than two years old, the TCJA has removed some prior restrictions. Previously, furnishing a personal lodging property did not qualify for Section 179 deductions, but they are now allowed to be listed.
A downside to Section 179 is the impact it has on the phase-out rule. A phase-out is when the eligibility of a tax credit decreases because of a person’s income. Having real estate as a deductible expense now means the phase-out rule will come into play sooner if a certain amount of property is added. Once that kicks in, it can wipe out a partial or total amount of a Section 179 deduction.
In addition to these alterations, the law has also had an impact on agricultural real estate. Any space that is being used for farming purposes, as well as being a place of business that was established within the past two years, is no longer required to abide by a fixed asset depreciation profile, such as the 150 percent declining balance method. They can now have the flexibility of an alternative depreciation system.