2021 Real Estate Tax Issues
Transcript of 2021 Real Estate Tax Issues
© MS Consultants, LLC 2021
2021 Real Estate Tax Issues
Jeff Hiatt
Kyle Young
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MS Consultants, LLC
• MS Consultants is made up of tax and construction professionals with over 250 years of experience
• We work with over 300 CPAs nationwide
• Years of experience:
– Cost Segregation Studies since 1996
– Tangible Property Regulation Reviews since 2004
– §179D energy efficiency certifications since 2006
– De Minimis Studies since 2014
– §45L energy certifications for apartments since 2010
Over 20,000 Studies completed, along with over 6,500 Form 3115s prepared and signed
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Please remember…
This presentation is intended for general educational and/or informational purposes only and does not replace specific, independent professional advice. This presentation is based on our current interpretations of the law. These interpretations may ultimately, after further IRS or other guidance be changed.
Statements and opinions expressed are those of the presenter or participants individually and, unless expressly stated to the contrary, are not the opinion or position of MS Consultants, LLC. MS Consultants, LLC assumes no responsibility for the content, accuracy or completeness of the information presented. Attendees should note that sessions may be audio-recorded and published in various media, including print, audio and video formats without further notice.
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➢Understand your client’s
situation
◼ One tool does not fix all,
choose wisely
➢Cash is King
More Tools for your Toolbox
Today’s Agenda
Pre-game:
Build Back Better (BBB), version 3
1. Cost Segregation Studies
2. Federal Energy Efficiency Incentives
1. §45L
2. §179D
3. Qualified Improvement Property (QIP)
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Pre-Game
Caution:
• This is not law yet but…
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Pre-Game
• WHAT IS NOT CHANGING
• Bonus Depreciation
• § 179
• Qualified Improvement Property
• De Minimis Safe Harbor policy/thresholds
• Estate Law
• § 1031 Exchanges
• UNICAP for new construction
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Pre-Game – Revenue Generators
➢ via WhiteHouse.gov
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Pre-Game – Penn Wharton Model
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• 3.8% tax on S-Corp. & Real Estate
Partnerships – over…
• $500,000 for MFJ or SS
• $400,000 for Single or HH
• $250,000 for MFS
Pre-Game - Potential Changes
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• Surcharge on High Income Taxpayers
• AGI over $10 million = 5%
• AGI over $25 million = an additional 3%
• Notes:
• A larger itemized deduction like Charitable
Contributions will not help lower this tax
• A large gain from selling real estate or a business
can trigger this surcharge
Pre-Game - Potential Changes
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• § 199A QBI DEDUCTION
• Senator Ron Wyden (D-OR) – Small Business Tax
Fairness Act proposal – phase out § 199A deduction
for taxable income from $400,000 to $500,000
• Sen. Wyden also proposing major changes to the tax
attributes of partnerships… stay tuned
Pre-Game - Potential Changes
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• OTHER
• Green Energy
• Expand
• 179D deduction - $1.80 to $3.00 (per square foot)
• 45L credit - $2,000 to $2,500 (per unit)
• Tax credit for larger zero-emission trucks
• Extend/Expand charging station credit
Pre-Game - Potential Changes
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• OTHER
• Increase funding for tax administration
• Direct IRS resources toward highest
income…
• Workers/Families… credits
• Make permanent Earned Income Tax Credit
for workers
• Extend or Make permanent Child &
Dependent Care
Pre-Game - Potential Changes
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• IRS approved method to accelerate
depreciation of specific assets
• IRS Tax codes §1245 and §1250
• Personal Property & Real Property
Cost Segregation Studies
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Sample Study
Taxpayer purchases a building
for $2,000,000 (net of land) in
2016, and has taken depreciation
over 39 years.
Cost Segregation Studies
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Cost Segregation Studies
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➢ Example: 2016 Acquisition
$2,000,000
Cost Segregation Studies
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$2,000,000
$232.940
➢ Example: 2016 Acquisition
Cost Segregation Studies
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40,000
160,000
260,000
1,540,000$2,000,000
$232,940
➢ Example: 2016 Acquisition
Cost Segregation Studies
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$439,332
➢ Example: 2016 Acquisition
Cost Segregation Studies
40,000
160,000
260,000
1,540,000$2,000,000
$232,940
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$206,392
➢ Example: 2016 Acquisition
Cost Segregation Studies
$439,332
40,000
160,000
260,000
1,540,000$2,000,000
$232,940
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$90,949
➢ Example: 2016 Acquisition
Cost Segregation Studies
$90,949
$206,392$439,332
40,000
160,000
260,000
1,540,000$2,000,000
$232,940
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$105,202
➢ Example: 2016 Acquisition
Cost Segregation Studies
$90,949
$90,949
$206,392$439,332
40,000
160,000
260,000
1,540,000$2,000,000
$232,940
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➢ Example: 2016 New Construction
Cost Segregation Studies
$122,091
$2,000,000
$124,400
$306,408
$539,348
40,000
160,000
260,000
1,540,000
$232,940
$ 124,400
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Five-year catchup depreciation on Form 3115. Acquisition
without bonus, construction with 50% bonus.
Comparison of Acquisition to New Construction – 2016
Cost Segregation Studies
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$27,820 $481,421 $453,601 $ 181,441
$181,441
$162,570
➢ Example: 2021 Acquisition or Construction
Cost Segregation Studies
$2,000,000
40,000
160,000
260,000
1,540,000
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Real Property: 27.5 or 39 Year (Structural Components)
➢HVAC units
➢Ceramic tile floors
➢Exterior doors
➢Windows
➢Interior plumbing
➢Siding
➢Concrete flatwork & foundations
➢Roof
Cost Segregation Studies
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HVAC Units
Ceramic Tile
Siding
Concrete flatwork
& foundations
Exterior Doors
& Windows
Roofs
Interior Plumbing
Cost Segregation Studies
Real Property: 27.5 or 39 Year (Structural Components)
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➢Removable site improvements
➢Certain site utilities & drainage
➢Fencing & gates
➢Site paving
➢Landscaping
➢& More
15 Year (Land Improvements)
Cost Segregation Studies
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Sidewalks, Steps
and Curbing
Retaining Walls
Trees, Landscaping
& Irrigation
15 Year (Land Improvements)
Cost Segregation Studies
Grid Striping and
Pavement Symbols
Paving
Site Lighting
& More
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➢Specialty plumbing & electric
➢Decorative wall coverings
➢Carpet and other removable flooring
➢Decorative lighting
➢Trim, cabinetry & millwork
➢Window treatments
➢& More
Other 5 & 7-year Property (Personal Property)
Cost Segregation Studies
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Decorative Trim
Decorative and
accent lighting
Window Treatments
Decorative wood panels, wallpaper
And other wallcoverings
Specialty electric
and plumbing
Carpet and
removable flooring
& More
Other 5 & 7-year Property (Personal Property)
Cost Segregation Studies
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➢ New buildings under construction
➢ Existing buildings undergoing renovation
➢ Purchases of existing properties
➢ Buildings purchased or constructed
since 1987
➢ Inherited buildings
Cost Segregation Studies
What buildings are eligible?
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Average➢ Hotels
➢ Office buildings
➢ Apartments
➢ Medical office buildings
➢ Shopping plazas
➢ Manufacturing facilities
➢ Restaurants
20 – 30%
12 – 30%
20 – 35%
15 – 32%
20 – 38%
20 – 45%
15 – 40%
Cost Segregation Studies
How much can be reclassified?
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• Profitability
• Impact of alternative minimum tax
• Early disposition
• Passive loss limitations
• Estate planning
• Intent to demolish (95-27)
• Impact of 1031 Exchange
Cost Segregation Studies
Things to Consider
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➢ Increased depreciation in earlier years, less taxes = more cash flow
➢Permanent savings when buildings are sold (capital gains vs. ordinary deduction)
➢Allows for future write-offs when structural components are replaced
Cost Segregation Studies
What are the Benefits?
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➢ No amended return for catch-up depreciation
➢ Savings taken all in one year
➢ Taxpayers receive an extra 30% - 100% on “non-real estate” assets (for assets acquired after 9/11/01)
Cost Segregation Studies
What are the Benefits?
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It’s easier being GREEN…
As a culture, we’re finally becoming OK
with the fact that you can save (or make!)
money by being environmentally friendly.
+ =
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§45L: Energy Efficient ResidencesHISTORY
➢ Established under the Energy Policy Act (EPAct) of 2005
➢ Notices 2006-27 and 2006-28 provided guidance
➢ Extended to 2008 by the Tax Relief & Health Care Act of 2006,
➢ Extended to 2009 by the Energy Improvement and Extension Act of 2008
➢ Extended again until 2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
➢ Extended again through the PATH Act of 2015
➢ Extended again through the CARES
➢ Most recently, extended again through the end of 2021◼ Consolidated Appropriations Act, 2021
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§45L: Energy Efficient Residences
➢Applicable for open tax years
➢Taking the $2,000 credit:
◼ In the year the property was placed in
service
◼ Amend a return from open tax years
➢Unfortunately, cannot use a Form 3115
to go further back
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§45L: Energy Efficient Residences
➢Available for any dwelling (residential unit) of 3 stories or less:➢ Single-family dwellings
➢ Duplexes and multi-unit houses
➢ Apartment buildings and complexes (under 3 stories above-ground)
➢ Only $1,000 credit available to qualifying manufactured homes
➢Credit goes to owner
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§45L: Energy Efficient Residences
➢Available for any dwelling (residential
unit) of 3 stories or less:
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§45L: Energy Efficient Residences
➢§45L requires units to achieve 50%energy savings.
➢ Savings are compared against 2006 IECC standards, previously 2003 IECC standards)
➢ Additionally, §45L requires 10% savings from the building shell as well—having super-efficient lighting and HVAC systems alone are not enough
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§45L: Energy Efficient Residences
Some states have already adopted the 2018 IECC standards (GREEN), which are 32% more efficient than the 2006 standards. This means they are almost there just for meeting code.
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§45L Case Study
$254,000
➢Garden-style apartment complex
➢New Construction – 2021
➢Located in southern US, so for obvious
reasons, performance of air conditioning
systems extremely important
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§45L Case Study
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§45L Case Study
Deduction $254,000
Number of Units Qualifying
(Computer Model Simulation)127
Property Type Apartment Complex - Garden Style
Year Constructed 2011
Number of Units 150
$254,000Credit
2021
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What is §179D?
➢ A tax deduction for energy-efficient expenditures made to depreciable commercial, government/municipal, or large (3+ stories) residential buildings that reduce energy use by 50% compared with similar structure built to ASHRAE/IES Standard 90.1-2001.
➢Maximum deduction: $1.80/SF➢ Partial deductions allowable of $0.60/SF for buildings
that do not meet overall threshold but have systems which are individually energy efficient
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➢Owner of a building, or lessee who installs energy-efficient systems➢ If multiple taxpayers install energy-efficient
systems in the same building, the deduction may be split between them, as long as the total deduction does not exceed the maximum $1.80/SF
➢ Buildings constructed or improved after December 31, 2005.
➢ NOW PERMANENT
§179D - Who is eligible for the deduction?
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§179D - Who is eligible for the deduction?
➢For government-owned buildings, the
deduction may be taken by the designer of
the building or system qualifying for the
deduction
➢NOTE-IRS Code Section 501(C)(3)
organizations are not eligible. This means
tax-exempt or non-profits do not qualify.
➢More details coming up….
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Review plans,
spec book, & cut sheets,
conduct site visit
Model full building
for overall energy use
performance
Complete report, including
all documentation for
certification
Model Systems Individually
Lighting
HVAC & Hot Water
Building Shell
$1.80/SF
(Full Qualification)$0.30-$1.20/SF
(Partial Qualification)
§179D Certification Process
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Lighting
Requirements
for a Partial
Qualification
Requirements for the Interim
Lighting Rule
2006-2008
16 ⅔ %
Placed in Service
Requirement for full
Qualification
Envelope
HVAC
25-50% Reduction in Lighting Power Density
(or 50% for warehouses)
2009-
3/12/2012
3/12/2012-
2013 - ?
50%
16 ⅔ % 10 % 10 %
Available Deduction
20 % 15 %
16 ⅔ % 20 % 25 %
$1.80/SF
Square Foot
$0.60/SF
$0.60/SF
$0.60/SF
$0.30-$0.60/SF
§179D - Partially Qualifying Systems
50%
16⅔ %
16⅔ %
16⅔ % 20 %
20 %
10 % 10 %
15 %
25 %
3/12/2012 –
2021
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§179D for architects and designers
Public Schools
Courthouses
Libraries
Municipal Buildings
… & more!
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§179D for architects and designers
Two caveats:➢ Architecture and engineering firms can’t certify
their own deduction—an independent certification is necessary: Per IRS Notice 2006-40, Section 5.05 (1), a “qualified
individual” capable of certifying a given property is:
-an individual that is not related to the taxpayer claiming the deduction under §179D.
➢ Architecture and designers cannot file Form 3115, but they can amend prior returns. (IRS Rev. Proc. 2012-39)
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§179D - Certification
➢Certification of the building systems must be done by “qualified individuals”
“Qualified Individuals”◼ must be a licensed engineer or contractor in the jurisdiction
in which the building is located
◼ must not be “related” to the taxpayer taking the deduction
◼ must self-certify, in writing, to the taxpayer that he/she has the requisite qualifications to provide the certification or to perform the inspection and testing
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§179D - Certification (continued…)
➢ Must include a field inspection and testing of the requirements –these procedures are being developed the National Renewable Energy Laboratory and will be posted on the web when completed.
➢ Certifiers must provide the building owner with an explanation and list of the energy efficiency features of the building and the projected annual energy costs.
➢ This certification is not required to be attached to the tax return.
➢ Taxpayer must maintain certification with its books and records.
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➢Office Building
➢New construction
➢Placed in service – 2021
➢120,000 square feet
§179D Case Study 1 – Full Qualification
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§179D Case Study 1 – Full Qualification
Office Building
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Reference Building Energy Use*
(Computer Model Simulation)1,211,266 kWh
Percent Energy Savings
IRS Threshold for Deduction
Deduction
Actual Building Energy Use*
(Computer Model Simulation)508,731 kWh
58%
50%
Property Type Municipal Office Building
Year Constructed 2007
Building Size 120,000 Square Feet
$216,000
2021
§179D Case Study 1 – Full Qualification
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➢ It is odd to think it took a pandemic to fix a tax problem that Congress
would not fix for over two years – The QIP tax life issue
➢ Under CARES, QIP’s tax life, and related Bonus Depreciation
treatment, has been corrected as follows
▪ For assets placed in service after 2017
▪ 15 year life, which means it is now available for Bonus Depreciation
▪ 20 year ADS life. If required to use ADS, no Bonus (for example,
under Sec. 163(j) Real Estate Exception Election
➢ Only for Commercial Property (ie, not for residential property such as
apartments and skilled nursing)
➢ Any interior improvement made that is not part of the “internal
structural framework” after a building has been placed in service
What is Qualified Improvement Property (QIP)
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➢ Cannot be applied to the 4 E’s: Expansions, Elevators, Escalators, or
External
➢ QIP is similar to the definition of Qualified Leasehold Improvement (QLI)
except that
▪ QIP can be applied to both tenant space and self-owned
property
▪ QIP eligibility begins after the building is placed in service =
Potentially a 1 day minimum (Rev. Proc. 2017-33)
▪ Remember, RARELY does 100% of a taxpayer’s improvement
qualify for QIP – because they usually are renovating windows, front
doors, HVAC outside of the building, expansions, elevators, etc.
What is Qualified Improvement Property (QIP)
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What is Qualified Improvement Property
(QIP)
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Questions?
508-878-4846
Thank you for listening!