The real estate industry is constantly changing with new market trends and emerging tax laws. Tax Cuts and Jobs Act (TCJA) made a few recent changes in income tax depreciation rules for real estate. Many of these changes are favorable and real estate investors need to know about them:
Generous Section 179
Section 179 used to put a damper on tax deductions. Following 2018, Section 179 became much more generous with reduction rules for real estate. The TCJA greatly have increased the maximum Section 179 deduction from $510,000 to $1 million, with annual inflation adjustments numbered at $1.02 million for 2019. The TCJA also increased the threshold for the Section 179 deduction phase-out rule to $2.5 million with annual inflation adjustments numbered at $2.55 million. When looking at real property expenditures, Section 179 allows investors a maximum annual deduction allowance of $1.02 million for tax years beginning in 2019 and beyond.
New Qualifying Real Property
Along with the change in annual deduction allowance, the TCJA has also changed the definition of qualifying real property. For nonresidential buildings, HVAC equipment. Fire protection, security systems, and roofs may now qualify for deductions. If the items you wish to be deducted were serviced after 2017, they qualify under the tax laws fo Section 179. Qualifying these items will have a major impact on future deductions for the 2019 tax year.
Including Personal Property
Another favorable change TCJA is now offering this year under Section 179 is restrictions on personal property deductions. Following the 2017 tax year, personal property used for furnishing may be deducted. This type of property includes kitchen appliances, furniture, or other equipment like lawn mowers. If the property is used in connection with a lodging facility, it may be deducted. Lodging facilities include motels, hotels, rental single-family or apartment homes, dormitories, or any other facility where sleeping accommodations are provided and rented out to tenants.
Section 179 Setbacks
While the changes of Section 179 are quite generous, there are some setbacks you should be made aware of. It’s important to have a lot of positive business taxable income, due to the fact that deductions claimed under Section 179 cannot create an overall tax loss from business activities. Be sure to talk with a tax professional before making deductions. Also, keep in mind that while you may save big on taxes now by claiming 179, there could be potentially higher taxes by the time you sell the property.