President Trump signed the Tax Cuts & Jobs Act into law on December 22, 2017. This is one of the largest tax reforms since 1986. Nearly all the provisions will go into effect starting January 1, 2018. Some of the provisions are permanent, while others will sunset on December 31, 2025. This law has the potential to ignite a boom into our economy. This blog will look at the impact on depreciation and on like-kind exchanges.
Depreciation Changes: IRS Section 179 depreciation for equipment increases from $510,000 in 2017 to $1,000,000 in 2018. There is a phase out for business entities that purchase over $2.5MM of equipment in a year. Another big change is to now allow Section 179 is now available for non-residential real property assets. This could allow for items like roofs, HVAC, fire protection, and alarm systems may qualify for Section 179 depreciation.
Bonus depreciation rules have changed. Prior to September 27, 2017, bonus depreciation was limited to 50% on eligible new property. After September 27 through December 31, 2022, the bonus depreciation was increased to 100% and is now available for both new and used property purchased for business.
Luxury automobile depreciation is loosened. In 2017 this was capped at $3,160 in the first year, $5,100 in year 2, $3,050 in year 3, and $1,875 every year after. The new tax law changes the limits to $10,000 in the first year, $16,000 in year 2, $9,600 in year 3, and $5,760 each year thereafter. There is an additional bonus of $8,000 available for luxury autos in 2018.
New agricultural equipment (other than grain bins, fences, and land improvements) is now on a shorter recovery period in the tax law is now recovered over 5 years instead of 7. This will increase the depreciation deduction and lower the tax liability for the farmer.
The law changed qualified improvement property by eliminating qualifications of leaseholds, restaurants, and retail establishments. The tax life has been lowered from 39 years to 15 years for interior improvements made to a non-residential building after the property is first placed in service. Elevators and escalators are excluded.
Overall depreciation of residential real estate has increased from 27.5 years to 30 years if the taxpayer opts out of limits on interest deductibility and increases from 39 to 40 years on non-residential structures. The old time-frame stays the same if the taxpayer agrees to the limits on the interest deductibility in the new tax law. This is one area with the extended term which will increase the tax liability of the taxpayer. Note, though, that the property owner can still use cost segregation to carve out improvements on property such as floor or wall coverings, to 5-year and 15-year property.
Section 1031 Changes: The new Tax Cuts & Jobs Act has eliminated the Section 1031 like-kind exchanges for all property except for real estate. So, you can still complete a 1031 for deferring the gain of a commercial piece of real estate to another piece of commercial real estate. Note that real estate is broadly defined and not classified by property type. Thus, you can defer your tax gain on a hotel you sell and take that basis into an apartment, retail building, or office.
The elimination of 1031 for non-real estate has eliminated deferring the taxable gain you have report upon sale of a piece of equipment, or other non-real estate asset used in business. One large source of non-realty 1031 exchanges was with race horses. Those will no longer be eligible.
Overall, the new Tax Cuts & Jobs Act will have a positive impact on the deductibility of capital expenses made in real estate and equipment. This increase in the deductions will lower the tax liability of the property owners. The impact would logically have a stimulus effect on the economy.