Real estate owners can thank a fix to the “retail glitch” — rectified in the $2 trillion economic bailout — for a new tax windfall.
The economic stimulus package that the federal government passed last month corrected what is widely considered to be a drafting error from President Trump’s 2017 tax cuts, which allowed businesses to write off the costs of certain improvements right away.
The 2017 legislation, however, excluded retailers from receiving the tax benefits.
But with thousands of shops and restaurants nationwide forced to close amid the Covid-19 pandemic, Congress decided to fix the oversight and extend the benefits to retailers — as well as real estate owners.
“There was an intention by Congress [in 2017] to have certain qualified improvement of property eligible for this writeoff in order to encourage investment,” said Jason Bazar, co-chair of the tax practice at the law firm Mayer Brown. “But they didn’t get it right and since the end of 2017, they’ve been looking for legislation to fix it.”
The new legislation allows real estate owners to write off the costs of certain improvements to the interiors of their properties in the first year — known as bonus depreciation — instead of spreading them out over the useful life, which is 39 years for commercial properties and 27.5 years for residential rentals.
Qualified improvements include interiors, like work on a new lobby. Structural improvements and upgrades to elevators were excluded.
Lynn Afeman, a managing director in KPMG’s national tax office, said the change could be a significant tax savings to real estate owners.
“When you think of huge office towers, the scope of those qualified improvements can be in the tens of millions of dollars each year,” she said.
The stimulus package included another tax change that could be a big boon to real estate investors. It lifted the $500,000 limit on how much business losses taxpayers could use to write off taxes on non-business income, such as capital gains.
Real estate owners can generate large tax losses on paper from depreciation. The change is expected to generate $170 billion in savings for taxpayers over the next 10 years.
While the economic bailout provided little else in terms of direct support to landlords, it does take other measures to help the real estate industry. The legislation aims to provide liquidity to financial markets, and extends certain unemployment and paycheck assistance to brokers.