100% Bonus Depreciation following up the recent podcast

23 Replies

@Yonah Weiss

I have  1 comment on this excellent episode. It was mentioned that asset has to be new for bonus depreciation, but starting this year both used and new asset qualify for the bonus depreciation. 

 Thanks for sharing this. 

@Yonah Weiss I asked a CPA about bonus depreciation and this is what he said:

"The new tax law changes bonus depreciations for qualified improvement property paid for starting 9/28/2017 and on, however rental real estate is not “improvement property”. The changes only effect tenant improvements to nonresidential property. SO when a tenant rents a space and fixes it up to be a restaurant, the improvements they made get the new 100% depreciation for 1 year only (then 80%, then 60%, onwards) So I’m afraid this law change will have no effect on you depreciation wise."

It sounds to me that he's saying, I as a landlord of a residential property would not benefit from this tax change because it wouldn't apply to me.  

I would like to get more opinions.  What are your thoughts?  

Originally posted by @Hiro Kitagawa :

@Yonah Weiss I asked a CPA about bonus depreciation and this is what he said:

"The new tax law changes bonus depreciations for qualified improvement property paid for starting 9/28/2017 and on, however rental real estate is not “improvement property”. The changes only effect tenant improvements to nonresidential property. SO when a tenant rents a space and fixes it up to be a restaurant, the improvements they made get the new 100% depreciation for 1 year only (then 80%, then 60%, onwards) So I’m afraid this law change will have no effect on you depreciation wise."

It sounds to me that he's saying, I as a landlord of a residential property would not benefit from this tax change because it wouldn't apply to me.  

I would like to get more opinions.  What are your thoughts?  

Your CPA might be confusing Bonus depreciation with 179 expense deduction. 179 deduction which was also increased to 100% with the tax reform can only be applied to non-residential property.

To clarify, the 100% bonus depreciation applies to property that has a useful life of under 20 years. This would apply to 5-year, 7-year, and 15-year property as identified through cost segregation. You cannot 100% bonus depreciate the entire property (real property)

Any of my colleagues with to corroborate? @Michael Plaks @Brandon Hall @Daniel Hyman @Logan Allec @Nicholas Aiola

@Yonah Weiss I appreciate your input.  So the benefit does apply to, say, a newly purchased duplex that I'm renovating, is that right?

@Yonah Weiss thanks for the tag.

@Hiro Kitagawa , qualified improvement property has become a bit more interesting than your CPA made it out to be.

Now, there is in fact a category for owners of non-residential real property called qualified improvement property (QIP) that as of 1/1/18 replaced the old qualified improvement property (yes, same), qualified leasehold improvement, qualified retail improvement, and qualified restaurant property classification rules, as well as includes some property that would not have fallen into those buckets previously.

The committee reports indicated that QIP placed in service on or after 1/1/18 would be eligible for a 15-year depreciable life as well as bonus depreciation rather than the standard 39-year, non-bonus eligible method applied to non-residential real property.

However, the law was not drafted correctly, i.e., there was a technical error, and the section of the tax code describing 15-year property (Section 168(e)(3)(E)) was in fact not amended to include qualified improvement property.

So for now, strictly-speaking, in 2018, qualified improvement property is regular old 39-year property that is not eligible for bonus depreciation.

We do expect that a technical correction to the law will be made, but for now the IRS has actually stated that it cannot guarantee that absent legislative correction it will accept the legislatively intended change in recovery period and bonus eligibility.

Anyway, this is neither here nor there since you have stated you are a landlord of residential rental property rather than non-residential real estate.

And this does not affect the application of 100% bonus depreciation to both qualifying new and used property place in service after 9/27/17 and before 1/1/23 that @Yonah Weiss pointed out.

@Yonah Weiss So, just so I am clear, as I am even more confused after listening to the podcast. I purchased a SFR in April of 2018, it will be rented out starting in June 2018. The home is from 1910. So, is the "placed in service" date June 2018? or is it back when it was built back in 1910? And since it is not new construction, does it even qualify for bonus depreciation?

Thanks in advance! 

Originally posted by @Isaac Braun :

@Yonah Weiss So, just so I am clear, as I am even more confused after listening to the podcast. I purchased a SFR in April of 2018, it will be rented out starting in June 2018. The home is from 1910. So, is the "placed in service" date June 2018? or is it back when it was built back in 1910? And since it is not new construction, does it even qualify for bonus depreciation?

Thanks in advance! 

 Isaac, congrats on your new property! The placed in service is 2018, and yes, it is eligible for bonus depreciation, thanks to the new law.

@Yonah Weiss Thank you, WOw! That is great! How might I be able to figure out just how much depreciation is eligible? And if you depreciate everything in year 1, are you still able to depreciate the building over 27.5 years? 

@Yonah Weiss this isn't correct.  

Residential real estate does not qualify for bonus depreciation. You must still depreciate this over the 27.5 years. 

As mentioned above the changes to bonus included 100% up from 50% on property with 15 year or less life- however they left out the wording on qualifying 15 year property in the new bill. 


Any property will longer life will never qualify. 

Originally posted by @Isaac Braun :

@Yonah Weiss Thank you, WOw! That is great! How might I be able to figure out just how much depreciation is eligible? And if you depreciate everything in year 1, are you still able to depreciate the building over 27.5 years? 

I'm afraid Yonah was off base on his response- please see my reply above 

Originally posted by @Natalie Kolodij :
Originally posted by @Isaac Braun:

@Yonah Weiss Thank you, WOw! That is great! How might I be able to figure out just how much depreciation is eligible? And if you depreciate everything in year 1, are you still able to depreciate the building over 27.5 years? 

I'm afraid Yonah was off base on his response- please see my reply above 

This is a rental property. I think Isaac was referring to the qualified property which is less than 20 year depreicable life. This means the 5, and 15 year property (1245), as identified with cost segregation is eligible for bonus depreciation. This was the context. 

But you are correct, the building which depreciates over 27.5 years is not eligible for bonus depreciation. Thank you for clarifying.

Thank you @Yonah Weiss and @Natalie Kolodij .  So, what is the difference between a 15 year property and a 20+ year property? I am assuming a single family home used as a rental is a 27.5 year property? 

Originally posted by @Isaac Braun :

Thank you @Yonah Weiss and @Natalie Kolodij .  So, what is the difference between a 15 year property and a 20+ year property? I am assuming a single family home used as a rental is a 27.5 year property? 

 The building is classified as 27.5 year depreciation, but there are assets (personal/tangible property) which depreciate over 5 years and land improvements which depreciate over 15 years. These can be allocated on the depreciation schedule, and depreciated at a faster rate. This is generally the process of cost segregation.

@Yonah Weiss So, these are things like A/C, furnace, roof those types of things? The previous owner put in all new windows as well.  

Isaac- not these would only be things that aren't attached to the home.

A/C, Roof, Furnace don't qualify on rental property (unless a commercial building, they just made some changes there) but if it's a residential home being rented, no. 

Items that you can potentially use Bonus on: 

5 year property that qualifies- Blinds, appliances, carpet.

Land improvements= 15 year (this is where there is still some issue in the new writing of tax code) this would be driveway, swimming pool.

Originally posted by @Natalie Kolodij :

Isaac- not these would only be things that aren't attached to the home.

A/C, Roof, Furnace don't qualify on rental property (unless a commercial building, they just made some changes there) but if it's a residential home being rented, no. 

AC and furnace are debatable

Just so you all know this is clear as mud. You are all saying different things and confusing this issue. Is there an IRS document that describes this, that anyone could point me to? 

This is a very important topic, because it is critical to understand when making decisions. Taking 100% can have a huge affect on your tax bill.

Originally posted by @Joe Splitrock :

Just so you all know this is clear as mud. You are all saying different things and confusing this issue. Is there an IRS document that describes this, that anyone could point me to? 

This is a very important topic, because it is critical to understand when making decisions. Taking 100% can have a huge affect on your tax bill.

 I guess I will preorder the 2018 Landlord Guide to Tax Deductions. I own the 2015 copy and its been very comprehensive. I am sure the new edition will have all the tax laws in place. After I read this book, most CPAs I talked with knew less than I did about real estate taxes. I don't think I've talked with Brandon or Amanda though ;)

@Yonah Weiss is correct about this. There are lots of assets that qualify on a rental. The 100% bonus depreciation is generally only used on a property that has had cost segregation, since without it the entire property cost is allocated to the long life 27.5 or 39 year schedule. On an average property there can be anywhere between 10% to 30% of the depreciable cost basis that would qualify for bonus depreciation as either 5 year tangible personal property or 15 year land improvements. It all depends on the specifics of the property and the level of build out. You could have two properties that are similar and one could have 15% qualifying assets and the other could have 25%.

A/C and furnace would generally not qualify for bonus depreciation, but on a nonresidential commercial property they now qualify for section 179. An exception would be if the A/C or furnace had a specialized purpose such as in a climate controlled self storage facility or a restaurant walk-in freezer. Then it'd be a 5 year asset and eligible for bonus. So in a rental the A/C, furnace, roof, and windows are all long life assets.

I'm sure the Guide to Tax Deductions is helpful, but without a qualified construction engineer or architect you'll find it difficult to take advantage of bonus depreciation on a property. 

@Yonah Weiss you seem to be claiming that under the new tax law if I put a new roof or HVAC placed in service in 2018 on my residential rental property, that I can take bonus depreciation. Is that 100% of the expense in year one? Everything I have read refers to this applying to non-residential properties so I am trying to understand how this applies. 

Originally posted by @Joe Splitrock :

@Yonah Weiss you seem to be claiming that under the new tax law if I put a new roof or HVAC placed in service in 2018 on my residential rental property, that I can take bonus depreciation. Is that 100% of the expense in year one? Everything I have read refers to this applying to non-residential properties so I am trying to understand how this applies. 

Roof and HVAC are eligible for 179 deduction, not bonus depreciation...but 179 is only for commercial not residential. This is a bit confusing, as these are two very similar types of deductions. This is why it's best to consult with an accountant before deducting anything from your income tax.

The assets that are eligible for bonus depreciation, (defined as 5, 7,or 15-year property by the IRS in the MACRS) applies both to commercial and residential, as long as it is not one's personal residence.

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