We're joined by Bill Smith and Steve Scheussler from ELB Consulting, a company that provides cost segregation studies, R&D tax credits, 179D, and 45L energy tax certifications and other engineered solutions to improve the ROI of a commercial property.
Today we discuss the new tax law changes to Qualified Improvement Property that can save commercial investors thousands in taxes, the Section 179D deduction, 45L energy tax credit, and much more.
Qualified Improvement Property (QIP)
QIP has historically had a 39 year depreciable life. In the 2017 Tax Cuts and Jobs Act, Congress intended to recategorize QIP to a 15 year life. But they didn't. In the CARES Act, this correction was made, and QIP now has a 15 year life.
QIP is improvements to the internal/interior portion of an existing nonresidential/commercial property that isn't involved in building expansion and elevators or escalators are excluded.
The property must have been previously placed in service, in existing use. A new building can't be completed with the expectations of qualified improvement property.
Previously, QIP fell into three categories: restaurants, retail, and other commercial spaces. This has been consolidated into the single category of just QIP.
This is important because QIP was previously ineligible for bonus depreciation. Now with a 15 year depreciable life, QIP is eligible for bonus depreciation. This reclassification of QIP extends back retroactively to 2018, so investors could theoretically amend their 2018 and 2019 returns to capture bonus depreciation for QIP.
QIP for Short Term Rentals?
The QIP discussion gets tricky when we invoke short term rentals! Short term rentals, with an average stay of 7 days or less on a transient basis, are treated as nonresidential/commercial property similar to hotels. So, does this mean that improvements made to the interior portion of a vacation rental are considered QIP? The vacation rental has a depreciable life of 39 years, the same as commercial property. This is still unclear, but it seems most likely that an investor could realistically categorize these improvements as QIP. Investors looking to take advantage of this need to be educated and aware of this situation, they need to be on board with the treatment.
If the short term rental property is being depreciated over 39 years on the tax return, then it stands to reason that the other treatments for nonresidential/commercial property also apply. This is still a grey area. At The Real Estate CPA, we are still digging through the tax code for a clear resolution. Right now, Bill and Steve agree with us on the explanation above. Before we make this a recommendation to an individual client, we will have citations to support this position.
Section 179D Deduction
Section 179D was released as part of the 2005 Energy Policy Act (EPAct). This is a tax deduction for residential and commercial investors designed to incentivize improvements to building efficiency and green energy components.
A commercial building can qualify for a deduction of up to $1.80 per sq./ft. This $1.80 is comprised of $0.60 for lighting, $0.60 for HVAC and hot water, and $0.60 for the envelope.
Each one of these portion can be qualified for independently. An investor could qualify for the full $0.60 on the lighting and nothing else.
This is difficult to execute. There are many factors to consider. The law requires a specific process for studying the building before and after improvements and also requires the use of specific software and measurements.
45L Tax Credit
45L was also released in the EPAct. This focuses on residential property of three floors or less above grade. An apartment tower of four floors or greater would qualify for the 179D. All smaller buildings qualify for the 45L.
45L is a tax credit, not a deduction, of $2,000 per qualified building unit.
Tax credits actually reduce your tax dollar for dollar, while deductions reduce your income. Tax credits are generally more beneficial.
Condos, townhomes, and single family homes are all eligible. However, criteria for all three categories must qualify (lighting, HVAC, and envelope).
Learn more about ELB Consulting: https://elbcostseg.com/