Several key tax provisions contained in the recently passed Protecting Americans from Tax Hikes Act of 2015 (PATH Act) are particularly favorable to the real estate industry. The legislation, a combination of permanent and extended provisions, will have a significant impact on the ability to plan for both real estate owners and their advisors in the coming years.
Permanent Provisions of the PATH Act Legislation Affecting the Real Estate Industry
The PATH Act permanently extends the 15-year straight-line recovery period for qualified leasehold improvements, restaurants, and retail improvements. A qualified leasehold improvement is any improvement to an interior portion of nonresidential real property if the following requirements are satisfied:
The improvement is made under or pursuant to a lease;
The lease is not between related persons;
The interior portion of the building is to be occupied exclusively by the lessee or any sublessee of that interior portion; and
The improvement is placed in service more than three years after the date the building was first placed in service by any person.
Excluded from the definition of qualified leasehold improvement property are expenditures attributable to:
The enlargement of the building;
Any elevator or escalator;
Any structural component benefiting a common area; and
The internal structural framework of the building.
In addition, the PATH Act makes permanent the Code Sec. 179 dollar expensing limitation of $500,000 with phase out beginning on qualifying investments of $2 million. Both dollar and investment limitations will be adjusted for inflation for tax years beginning after 2015. Eligible property includes qualified real property (qualified leasehold improvements) up to $250,000 of the $500,000. Changes to IRC Section 179 after 2015 include:
Removal of qualified real property cap limit; and
Air conditioning and heating units considered qualifying property.
Extended Provisions of the PATH Act Legislation Affecting the Real Estate Industry
The PATH Act extends and modifies the bonus depreciation allowance to apply to qualifying property placed in service before January 1, 2020 as follows:
50% first-year deduction from 2015 through 2017;
40% first-year deduction in 2018; and
30% first year deduction in 2019.
Qualifying property includes:
Original use property (cannot be used);
MACRS property with a recovery period of 20 years or less; and
Qualified leasehold improvement property.
Modifications after 2015 include:
Bonus depreciation allowed on “qualified improvement property” that does not need to be placed in service pursuant to the terms of a lease; and
Removal of requirement that improvement be placed in service more than three years after the building is placed in service
Additionally, PATH Act legislation provides for a two-year extension (through 2016) of the Section 179D enhanced deduction for energy-efficient commercial buildings. The qualifying energy efficiency standards are increased from ASHRAE 2001 to ASHRAE 2007 for properties placed in service after December 31, 2015. The 179D deduction allows taxpayers to take a federal deduction of up to $1.80 per square foot for expenditures installed as part of:
Interior lighting systems;
HVAC and hot water systems; and
A two-year extension (through 2016) of the Section 45L residential tax credit is also included in the new legislation. The tax credit is equal to $2,000 per residential unit or dwelling for developers of energy-efficient buildings. Qualifying properties must be three stories or lower and can include:
Single family homes.
The above provisions are just a few of the more than 50 included in the PATH Act that provide certainty on tax positions and should help facilitate decision making in the next few years.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.