Expensing vs. Depreciating Assets Under New Tax Law

[Josh F.]

I am getting a bit confused about what capital improvement costs for my real estate portfolio can be immediately expensed vs need to be added to my basis and depreciated over time.  I am further confused by the concept of Bonus Depreciation and Section 179 expensing, and how that impact things.  Add to that confusion is the concept of Safe Harbor as it applies to all of the above.  Finally, understanding how the new tax law impacts all of the above rounds out my questioning.

Can anyone point me to a overview that talks to all of the above issues and spells things out clearly?

[Ashish Acharya]

@Josh F.

Depreciation is not something that you would grasp right away if it is not your job to do taxes, (Let your CPA do all the hard work), but I get that you want to know the high-level.

Generally, all the improvements to the property needs to be added to the basis (not repairs – Although repairs will have to be added if done before placing a property in service).

All these safe harbors, bonus, and sec 179 is here to let us deduct cost rather than capitalizing it.

• Safe Harbor: If your improvement for a unit of the property (UOP) is less than 2500 you can deduct it. ( if you RE portfolio is big enough and you have audited Financials it's 5000)
• Bonus depreciation (100% going forward until 2023): Improvements to the building and system are not eligible for bonus depreciation. But there is something called QualifiedImprovement property. You cannot take bonus depreciation on the qualified improvement for the residential property (you can take bonus depreciation on the non-residential Qualified Improvement Property).
• Section 179: Again new under new TCJA, you can take sec 179 on qualified improvement property on the Nonresidential property. Before tax reform, property used to predominantly to furnish lodging or in connection with the furnishing of lodging (property used in apartments) did not qualify as Section 179 property, But this restriction has been lifted, and property can qualify for section 179 full expensing (there is a limit). Some of the aspects are still unclear and we are waiting for clarification from IRS.

Hope that helps. It’s your CPA’s Job to do this. If you are deciding on making improvements, give your CPA a call before  taking an action.