The concept of "bonus appreciation" in commercial real estate gained significant attention following the Tax Cuts and Jobs Act (TCJA) of 2017. This legislation brought several changes to the U.S. tax code that impacted the commercial real estate sector, particularly through bonus depreciation rules. Here’s an overview:
### What is Bonus Depreciation?
Bonus depreciation allows businesses to immediately deduct a significant percentage of the purchase price of eligible assets, rather than spreading those deductions over the asset's useful life. This accelerated depreciation can significantly reduce taxable income in the year the asset is placed in service.
### Changes Introduced by the TCJA
1. **Increased Deduction Percentage**:
- The TCJA increased the bonus depreciation percentage from 50% to 100% for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. This means that businesses could immediately deduct 100% of the cost of eligible assets in the year they were put into service.
2. **Expanded Eligibility**:
- The definition of eligible property was expanded to include used property. Previously, bonus depreciation was only available for new property. This change significantly broadened the scope of assets that could qualify.
3. **Qualified Improvement Property (QIP)**:
- The TCJA intended to include QIP (interior improvements to nonresidential buildings) as eligible for bonus depreciation. However, a drafting error initially excluded it. This was later corrected by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020, making QIP eligible for 100% bonus depreciation retroactively to January 1, 2018.
### Impact on Commercial Real Estate
1. **Immediate Write-Offs**:
- Property owners and investors could immediately deduct a substantial portion of the cost of new or used assets, such as building improvements, furniture, fixtures, and equipment. This accelerated deduction could result in significant tax savings and improved cash flow in the early years of ownership.
2. **Increased Investment Activity**:
- The immediate tax benefits provided an incentive for increased investment in commercial real estate properties and improvements. Investors could reinvest the tax savings into additional properties or improvements, potentially leading to greater economic activity within the sector.
3. **Strategic Planning**:
- Real estate investors had to carefully plan the timing of acquisitions and improvements to maximize the benefits of bonus depreciation. This required coordination with tax professionals to ensure compliance and optimal tax outcomes.
4. **Impact of Phase-Out**:
- The 100% bonus depreciation rate begins to phase out for property placed in service after December 31, 2022. The deduction percentage decreases by 20% each year until it is completely phased out by January 1, 2027. This impending phase-out could accelerate investment and improvement activities in the near term as investors seek to take advantage of the full deduction before it diminishes.
The bonus depreciation provisions introduced by the TCJA significantly enhanced the attractiveness of investing in commercial real estate by providing immediate tax benefits, which in turn could stimulate economic activity and growth within the sector.
