Bonus Depreciation on Real Estate Construction

The question came up of whether any part of real estate construction would qualify for the bonus depreciation.

An asset qualifies for the bonus depreciation if:

(1) It has a MACRS recovery period of 20 years or less, is computer software or qualified leasehold improvement.

a. This generally excludes real estate as real estate has a MACRS period longer than 20 years.

(2) It is acquired after 9/8/2010 and before 1/1/2012

(3) Original use starts with the taxpayer

The bonus is not insignificant. The bonus for 1/1/2010 to 9/8/2010, for example, was 50%. This means that one could depreciate ½ the cost right off the top. Effective 9/9/10, that percentage was increased to 100%. That means that you can buy it and expense it – all of it – in the same year. One can elect out of the bonus if one does not need that much depreciation. It can happen. I saw an opt-out election today for a client.

The tax code therefore tries to exclude real property from bonus depreciation under Sec 168(k). That leaves us with personal property, and more specifically tangible personal property, as potentially qualifying. The tricky thing is that the tax code does not directly define the term “personal property” for purposes of depreciation. Instead the Code says that we should look at Regulation 1.48-1(c) for its definition of “tangible personal property.”

NOTE: Section 48 involves the now defunct investment tax credit (ITC).

We here have a loophole. We need to find something that looks like real property BUT is considered tangible personal property under Regulation 1.48-1(c). This could happen, as Section 48 was not concerned with depreciation; instead it was concerned with a tax credit. There has been ITC guidance from the IRS through field directives in diverse industries such as restaurants, dealerships and casinos.

Here are some common improvements that will qualify for the bonus depreciation:

(1) Landscaping, including a related irrigation system.

(2) Parking lots

(3) Perimeter fencing and sidewalks

(4) Clearing, grading and excavating directly related with the construction of sidewalks and parking lots

(5) Light poles

(6) Surveillance systems

(7) Signs

(8) Awnings

(9) Wall coverings

(10) Window treatments

(11) Decorative interior lighting

(12) Floor coverings, including carpets

(13) Certain exterior lighting

Heads up, therefore, if you are constructing a building. Make sure that your GC traps these costs for you, and you are well on your way to some significant tax write-offs.