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Thursday, December 5, 2013

Real Estate Tax Breaks Retroactively Reinstated by Taxpayer Relief Act of 2012


Below is a summary of the provisions of The Act that we feel will be of interest to our real estate clients. The list below is by no means all inclusive, but a compilation of major items you should be aware of.

Bonus First Year Depreciation
This popular tax benefit has been extended for one year. An additional 50 percent first-year depreciation deduction is allowed for certain property placed in service before January 1, 2014. The additional first year depreciation is allowed for both regular tax and alternative minimum tax (AMT). Just like before, a taxpayer may elect out of additional first-year depreciation for any class of property for any year.

As a reminder, the asset qualifies for the additional depreciation if:

  • It is property qualified to be depreciated under the MACRS depreciation system with 1) a recovery period of 20 years or less, 2) certain computer software, or 3) qualified leasehold improvement property (definition follows);
  • It is placed in service before January 1, 2014 (with some exceptions);
  • Its original use commences with the taxpayer (i.e., the property is brand new).

Fifteen-Year Depreciation for Qualified Leasehold Improvements
The Act retroactively extended for two years the depreciation provisions allowing the above mentioned property to be depreciated over 15 years. Such property qualifies for a 15-year recovery period if it is placed in service before January 1, 2014.

To remind our readers, in general, “qualified leasehold improvement property” includes interior improvements to a building which is nonresidential real property if the following criteria exists:

  1. The improvement is a real property (i.e., drywall as opposed to a computer);
  2. The improvement is made “under or pursuant to a lease” either by the lessee, sublessee or lessor of the building portion;
  3. The portion of the building is to be occupied exclusively by the lessee (or any sublessee) of the portion;
  4. The improvement is placed in service more than 3 years after the date the building was first placed in service.

Retail Improvements and Restaurant Property
“Qualified restaurant property” is any real estate property which is a building or an improvement to a building, if more than 50 percent of the building’s square footage is devoted to preparation of, and seating for on-premises consumption of, prepared meals. “Qualified retail improvement property” is “any improvement to an interior portion of a building that is nonresidential real property” if (1) that portion is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public, and (2) the improvement is placed in service more than 3 years after the date the building was first placed in service.

Section 179 Deduction
Retroactively, effective for tax years beginning in 2012, the Act increased the maximum expensing amount under Code Sec. 179 from $139,000 to $500,000. Effective for tax years beginning in 2013, the expensing amount is increased from $25,000 to $500,000.
The Act also provides that:

  • Off the self computer software is expensing-eligible property if placed in service in a tax year beginning before 2014.
  • For tax years beginning before 2014, an expensing election may be revoked without the IRS’s consent.
  • For any tax year beginning in 2010, 2011, 2012 or 2013, up to $250,000 of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property is eligible for expensing.

Reduction in S Corporations Recognition Period for Built-in Gains
The Act provides that for determining the next recognized built-in gains for tax years beginning in 2012 or 2013, the recognition period is the 5-year period beginning with the first day of the first tax year for which the corporation was an S corporation. As of the date of this article, the State of California did not conform to any of the provisions outlined above.

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