As the end of 2019 approaches, commercial real estate owners and investors are looking for strategies to increase their 2019 tax deductions and reduce income taxes. The 2017 tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA) provides new and unique opportunities to maximize tax savings on several common commercial real estate activities, and year-end planning is the right time to realize these benefits.
Implementing certain tax planning provisions, such as Section 1031 like-kind exchanges, cost segregation studies and tangible property regulations analysis, may help real estate owners, operators and trusts offset costs and identify preferred tax treatments.
The timing of those savings’ benefits could be felt immediately, potentially eliminating or reducing the Jan. 15, 2020 quarterly estimated income tax payment.
Under Section 1031, individuals and businesses with real estate held for investments, rental income or business purposes can defer state and federal tax liability by exchanging a real property for another of the same type.
Business operators will need to consider their economic objectives before deciding whether a like-kind exchange is a good fit. Some individuals may be looking to exit the market, in which case they would want the cash on hand from the sale of a property. For commercial real estate groups that are frequently selling one property in order to purchase another, like-kind exchanges can be more appealing.
Situations that Are a Good Fit for Like-Kind Exchanges
Properties that make good candidates for like-kind exchanges include those where the sale of the property may come with a large profit and therefore a large taxable gain. Consider using an exchange if you are planning to dispose of property that has experienced a significant increase in property value or if there is a low basis in the to-be-disposed-of property due to a long holding period. It’s important to note that under the TCJA reforms to Section 1031, personal or intangible property is no longer eligible for like-kind exchanges unless the taxpayer disposed of the exchanged property or received the exchanged property on or before Dec. 31, 2017.
Timing & Other Considerations
Like-kind exchanges do not have to be completed before the end of the year to have benefits for 2019 taxes; they simply must be executed before you would file your tax return. There are tax complexities to consider in a like-kind exchange, so it’s important to enlist an experienced professional right away. Working with a qualified intermediary (QI) can help you avoid triggering taxable gains in certain scenarios, such as if you end up reinvesting less than the full amount of the property sales or have a cash “boot” from the fair market value of the sold property. Additionally, there are strict timing restrictions on the exchange. Section 1031 exchanged assets must be named within 45 days of the sale of the original property and proceeds from the sale must be used to purchase the new property within 180 days.
Cost Segregation Studies
Real estate owners and investors can also realize significant tax benefits by utilizing a cost segregation study before they file their 2019 tax returns. Cost segregation studies help real estate owners and operators accelerate qualifying assets into shorter depreciable lives. This strategy is particularly significant due to the TCJA’s increase to the bonus depreciation deduction. The 100% deduction for qualifying assets can be a huge cost saver and potentially eliminate or reduce 2019 fourth quarter estimated tax payments.
Situations that Are a Good Fit for Cost Segregation Studies
Cost segregation studies are also useful as the bonus depreciation deduction can now be used for used properties acquired after Sept. 27, 2017. If you have acquired a building since Sept. 27, 2017and the building has not had a cost segregation study, there could be significant savings. If you have built a new building in the last 10 years and have not had a cost segregation study, you could also benefit from a review. The greater benefits are available for assets with depreciable costs of $500,000, depending on how much was paid for the property.
Timing & Other Considerations
Because of the potential for cost segregation to help with quarterly estimated tax payments, the sooner the cost segregation study is conducted, the better. As with a like-kind exchange, the study does not have to be completed before the end of the year for commercial real estate owners and operators to reap the benefits on their 2019 taxes. The cost segregation must be completed before the 2019 tax returns are filed.
Tangible Property Regulations
Tangible property regulations (TPRs) may provide property owners the opportunity to expense certain previously capitalized expenditures like materials and supplies, repairs, renovations and maintenance on a building or rented space. A partial disposition deduction (PAD) may also be available where a renovation is required to be capitalized. The PAD allows taxpayers to take a deduction for the remaining net book value of the assets removed. There is also the option of claiming a deduction on the next filed tax return for the net book value of capitalized renovation costs that should have been expensed under the TPRs. The deduction is claimed by filing Form 3115 as an automatic accounting method change.
Timing & Other Considerations
As with cost segregation, TPR analysis can potentially eliminate or reduce quarterly income taxes, so the sooner the analysis can be undertaken, the better.
Timing & Next Steps
Business owners who expect a higher tax bill in 2019 than 2020 may consider accelerating expenses into 2019, while those anticipating more income in 2020 may want to wait and defer the expense into the following year.
For businesses that expect to see comparable income taxes year over year, it’s a good idea to take advantage of accelerating the deductions in 2019. The New Year brings some additional uncertainty for current tax laws, particularly due to the upcoming presidential election next November.
To learn more about these tax saving tips or to reach us with questions, please contact the author, Larry Rosenblum, at email@example.com or 561.922.3006 or contact us at a CBIZ location near you.
Published on November 14, 2019