Top 5 tax-planning and tax-saving strategies for real estate owners

Top 5 tax strategies for real estate owners

March 30, 2021 11:41 AM

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With the passage of so much tax legislation over the past several years, including the tangible property regulations, the Tax Cuts and Jobs Act, the CARES Act, several COVID-19 stimulus bills, and various new federal, state and local regulations, there is tremendous opportunity to implement tax-planning and tax-saving strategies for real estate owners.

When it comes to tax-saving strategies, there are many opportunities available for real estate owners as the tax landscape is ever changing. It’s crucial to stay vigilant around any changes that may occur to ensure that all available opportunities are being discussed, planned and utilized where applicable.

Many of the provisions included in these tax laws and regulations are taxpayer-friendly. To leverage the opportunities available to them, it is important for real estate owners and all taxpayers to be aware of the laws currently in place. Here are the top five recommended tax-planning and tax-saving strategies:

Cost segregation studies

These studies are specifically beneficial to real estate investors, as they allow for accelerated depreciation of identified assets that may otherwise be trapped in long-life building assets.

Currently, this opportunity is greatly enhanced with the introduction of 100 percent bonus depreciation from the TCJA, but only on those specific assets identified in a cost segregation study. The personal property and land improvement assets that are currently being depreciated over 39 years can be adjusted to a shorter life, and therefore bonus-eligible — 100 percent bonus means immediate expensing for those items.

The TCJA has also expanded the definition of assets available for 100 percent bonus depreciation to include acquired or used property. This is another huge opportunity for quicker write-offs for investors who are acquiring property.

Tangible property regulations

Yes, tangible property regulations still exist today and have survived all subsequent tax laws and changes. TPRs have provided taxpayers with a new definition of repairs and have made expensing opportunities easier. This includes things like HVAC rooftop units, roofs and other building units of property that previously had to be capitalized and depreciated over a long life — even better, these expensing opportunities can be applied retroactively. An asset that was properly capitalized under the old rules that meets the new definition of expense can be written off with an automatic approval of a change in accounting method.

The TPRs have also provided an opportunity to write off the remaining basis of structural components for the first time. Prior to this change, for example, taxpayers would oftentimes be depreciating two or three roofs, or more, on the same building. But the TPRs allow for writing off the basis of the old roof, if it is specifically identified. This is the case for all replaced structural components of a building.

De minimis safe harbor

An additional immediate expensing opportunity available includes the de minimis safe harbor that was introduced with the TPRs. This safe harbor allows taxpayers to elect to deduct certain items that fall under a specific dollar threshold. The de minimis rules, when properly elected and utilized, provide an opportunity to expense many expenditures every year that would otherwise be capitalized, and also provides for additional administrative convenience. This immediate expensing opportunity has been popular and allowed for tremendous savings for taxpayers.

Enhanced Section 179

This is another option for immediate expensing. The TCJA increased the maximum deduction to $1 million with a phase-out increased to $2.5 million. These amounts have been and will continue to be indexed for inflation. Section 179 used to be available for personal property but has been expanded to include certain real property expenditures as well, such as roofs, HVAC equipment, fire protection, qualified improvement property and more. These enhanced limits and eligible units of property provide strategic planning opportunities for taxpayers.

CARES Act

A technical correction in the CARES Act gives taxpayers the ability to depreciate qualified improvement property using a 15-year life from a 39-year life, thereby making it bonus eligible. QIP is property placed in service as an improvement to an interior portion of a building that is not structural in nature as long as the improvement is placed in service after the date in which the building was placed in service. This allows for immediate expensing to many leasehold improvements, renovation projects, build-outs and more.