CARES Act - Qualified Improvement Property Technical Amendment

Included among the provisions of the CARES Act is the long awaited technical correction for the definition of Qualified Improvement Property. 

In the original Tax Cuts and Jobs Act legislation passed in 2017, the Qualified Improvement Property provisions were meant to allow landlords and other owners of nonresidential real estate to accelerate tax deductions related to the interior renovation of their property. Congress' intent was to generally allow taxpayers to claim the entire cost of such renovations as a tax deduction in the year the renovation was placed into service; or, at the taxpayer's election, claim the deductions over a 15-year period.

Instead, a flaw in the drafting of the statute resulted in taxpayers being unable to claim the entire cost as a tax deduction in the year the renovation went into service. The cost would generally have to be deducted over a 39-year time window.

Until now, congressional gridlock has prevented the definition of Qualified Improvement Property to be amended to reflect the original intent of lawmakers. The CARES Act corrects the drafting error in the original statute and now permits taxpayers to receive all the intended benefits from the Qualified Improvement Property provisions.

As this amendment is effective as of the same date of the original Tax Cuts and Jobs Act in 2017, taxpayers may claim the tax benefits from this corrected definition with their 2019 tax returns. Additionally, they may amend previously filed tax returns if they have performed renovations that otherwise met the definition of Qualified Improvement Property.

However, property owners that also made an election to be exempt from the interest limitation rules under IRC 163(j) may not be excited for this change. Making such an election generally precludes a taxpayer from claiming the benefits of the Qualified Improvement Property provisions, and the election is currently not revocable.  There is much discussion regarding whether the government will loosen the restrictions in such situations since the rules were changed retroactively.  We will continue to monitor this development closely.

Taxpayers interested in learning more about the new Qualified Improvement Property rules, and interested in other strategies to maximize the tax benefits of constructing or renovating real estate, should contact Schneider Downs' at [email protected].

Please visit our Coronavirus resource page at schneiderdowns.com/our-thoughts-on/category/Coronavirus for related content.