tax saving opportunities for real estate owners

© MS Consultants, LLC 2020

Tax Saving Opportunities for Real Estate Owners

Speakers: Jeff HiattDavid FabianKyle Young

What’s in yourToolbox?

COVID 2.0

MS Consultants, LLC• MS Consultants is made up of tax and construction

professionals with over 250 years of experience• We work with over 235 CPA Firms nationwide• Years of experience:

• Cost Segregation Studies since 1996• Tangible Property Regulation Reviews since 2004• §179D Energy Efficiency Certifications since 2006• §45L Energy Certifications for apartments since 2010• De Minimis Studies since 2014

Over 18,000 Studies completed, along with over 6,000 Form 3115s prepared and signed

Please remember …This presentation is intended for general educational and/orinformational purposes only and does not replace specific,independent professional advice. This presentation is based on ourcurrent interpretations of the law. These interpretations mayultimately, after further IRS or other guidance be changed.

Statements and opinions expressed are those of the presenter orparticipants individually and, unless expressly stated to the contrary,are not the opinion or position of MS Consultants, LLC. MSConsultants, LLC assumes no responsibility for the content, accuracyor completeness of the information presented. Attendees should notethat sessions may be audio-recorded and published in various media,including print, audio and video formats without further notice.

Agenda1. 5-year NOL Carryback – The Decision2. Qualified Improvement Property (QIP)3. Rock, Paper, Scissors (RPS)4. Cost Segregation Studies (CSS)5. Tangible Property Regulations Update (TPR)6. Other Opportunities (OO)

What’s in yourToolbox?

We will be discussing many of the cash retention strategies and tax saving opportunities available.

But be aware of the murder hornets….

Leaving the house in 2019: Wallet, Keys, Phone

Leaving the house in 2020: Wallet, Keys, Phone, Mask, Sanitizer, Hornet Spray,

Holy Water, Samurai Sword, & More

COVID 2.0 – What’s next?

5 Year Net Operating Loss Carryback

THE NET OPERATING LOSS CHANGES

• Individual Net Operating Losses from 2018 - 2020 can now becarried back 5 years.

• 2018 NOL 2013• 2019 NOL 2014• 2020 NOL 2015


5 Year Net Operating Loss Carryback –The Decision

CARRYBACK / CARRYFORWARD /USE AGAINST CURRENT INCOME

• Federal Tax Rates before 2018 were up to 10 points higher (anincrease of up to 25% more) than current tax rates = 39.6% vs29.6% So “old tax dollars” potentially are worth more than “newtax dollars”

• This difference in rates can create a PERMANENT tax savings• Must be weighed against the timing/speed of a tax refund – how

quickly does your client need to improve their Cash Flow? Theymay need a 25% tax rate refund this year a lot more than a 39.6% taxrate refund a year from now.

• After the November Elections, will future Income Tax ratesincrease? Potentially, under the Biden plan



• EXAMPLE – Taxpayer has a $500K QIP that was incurred in 2018.Federal Taxable Income before QIP $500K write off is:2018 - $350K2019 - $900K2020 - ($200K) Loss

Do you recommend Amending 2018, Amending/3115 for 2019,or waiting and filing a 3115 for 2020?Do you have suspended Business Losses in 2018/2019?

• Client Discussions may be needed if enough tax $ are at stake• Your own State’s rules may be different than the CARES /TCJA

rules. For example, New York does not follow any of the CARESchanges – No QIP, no Loss conformity



A basic worksheet that allows you to accumulate the information you will needto assist you in the process of determining the best Tax Results Vs. Cash FlowNeeds

The long awaited QIP correction:

• Under CARES, QIP’s tax life, and related Bonus Depreciationtreatment, 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

• If property was started before 9/27/17, the QIP may have to followthe pre-TCJA Bonus rules (40% in 2018, 30% in 2019, 0% in 2020)

Qualified Improvement Property


• QIP was introduced effective 01/01/16• 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• 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 improvementqualify for QIP – because they usually are renovating windows, frontdoors, HVAC outside of the building, expansions, elevators, etc.

• For example – the standard “Tenant Allowance” in a LeaseAgreement does not meet the QIP definition = no BonusDepreciation. Must review the Costs that your Client paid

• Based on MSC experience of having performed over 500 QIP Studies,15% to 40% of most improvement costs do not meet the QIP definition.Taxpayer problem – 20% Negligence Penalty can be applied ifdeductions are overstated by as little as $20,000 without reasonablesupport• See our Flowchart for other ideas that should be considered with

every QIP for better tax results for your client



Immediate Expensing:Rock, Paper, Scissors


What is the Best Choice?De Minimis - Bonus Deprecation - Sec. 179 Expensing

De Minimis Expensing Rule-1.263(a)-1(f)

Definition:Useful life less than 12 months

ORProperty costing less than certain dollar amount

ANDMust be expensed on books/financial statements

- AFS = $5,000 non-AFS = $2,500

Rock, Paper, Scissors –What is the Best Choice?


De Minimis

• The safe harbor is determined at the invoice item level• Eligible if the amount paid for the unit of property does not

exceed the threshold, regardless of the invoice total• This includes all soft costs ON THE INVOICE

• Sales tax• Shipping• Installation• Design



De Minimis

Example: $443,000 invoice for hotel FF&E ($2,500 threshold)- $56,000 for shipping and sales tax included above

• $225,000 of mattresses (250 @ $900 each)• Adjusted unit of property price is $1,030 each

• $94,000 of TVs (250 @ $375 each)• Adjusted unit of property price is $429 each

• $56,000 of dressers (250 @ $225 each)• Adjusted unit of property price is $258 each

• $11,000 of lounge couches (5 @ $2,200 each)• Adjusted unit of property price is $2,518 each



De Minimis (actual Project Summary)



SAMPLE LLCHotel - TPR Analysis1 Sample AvenueSample, California

Site Concrete 15 - - - 57,549 - 57,549 Site Fencing & Gates 15 - - - 34,413 - 34,413 Landscape Planters 15 - - - 30,777 - 30,777 Roofing 39 - - 97,684 - - 97,684 Drop Ceilings (203 Rooms 39 - - 454,365 - - 454,365 Cermanic Tile Upgrade 39 - - 34,868 - - 34,868 Awnings & Sunscreens 5 - - - - 62,010 62,010 Breakfast Room Cabinets 5 - - - - 46,260 46,260 Reception Desk 5 - - - - 4,569 4,569 Kitchen Equipment 5 - - - - 16,772 16,772 Wireless Access Points 5 - - - - 38,710 38,710 Oracle Equipment 5 - - - - 7,995 7,995 De Minimis D 1,598,716 - - - - 1,598,716 General Repairs R - 355,060 - - - 355,060 Exercise Room Refresh R - 15,397 - - - 15,397 Restroom Room Refresh R - 6,366 - - - 6,366 Front Desk Area Refresh R - 13,528 - - - 13,528 Float Walls (203 Rooms) R - 269,100 - - - 269,100

1,598,716 659,450 586,917 122,738 176,316 3,144,136

50.85% 20.97% 18.67% 3.90% 5.61% 100%

Description Life DE MINIMIS EXPENSE

REPAIR EXPENSE 39 YEAR 15 YEAR 5 YEAR TOTAL

Totals

Percentages

De Minimis – Key Guidelines

• Must apply same treatment to books and tax return• Must apply consistent application• The de minimis safe harbor is elected annually by including

a statement on the taxpayer’s tax return for the year elected



De Minimis – Final thoughts

• Huge potential benefit• No future depreciation recapture• Form 3115 not available, current election only• Consistency is key



Bonus Depreciation

• Taxpayers are able to expense 100% of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023

• After that it decreases by 20% per year resulting in no bonus in 2027… or at least not yet



Bonus Depreciation

• Provision expands the property eligible forimmediate expensing to include used property

• The deduction applies only to property purchased inan arm’s-length transaction

• Like the prior law, asset class life must be 20 yearsor less

• 15-year Land Improvements are eligible• 5 & 7-year personal property are eligible



Bonus Depreciation - EXCLUSIONS

• In the case of trade-ins, like-kind exchanges, or involuntaryconversions, it applies only to any money paid in addition tothe traded-in property or in excess of the adjusted basis of thereplaced property

• It does not apply to property acquired in a nontaxableexchange such as reorganization, to property acquired from amember of the taxpayer’s family, including a spouse,ancestors, and lineal descendants, or from another relatedentity as defined in Section 267

• Auto and equipment dealers with floor plan financing NOWqualify for bonus under Reg-106808-19 if certain criteria aremet.



Bonus Depreciation – Acquired Property:

• Date of acquisition for the bonus rules will bedetermined by date of a written binding contract

• Binding generally means “legally enforceable” –which is a complicated legal discussion

• For example, if there were contingencies that werenot lifted until after 9/27/17, taxpayer may be ok



Bonus Depreciation – Acquired Property:



What is bonus eligible?

Bonus Depreciation – Constructed Property:



What is bonus eligible?

Bonus Depreciation – Constructed Property:

• Effective date of bonus is the date that greater than 10% ofphysical activity related to the construction has taken place• EXAMPLE 1 – New construction with 25% complete as of

9/27/17, project 100% complete as of 12/31/17 – Bonus at 50%• EXAMPLE 2 – New construction with less than 10% complete as

of 9/27/17, project complete as of 12/31/17 – Bonus at 100%• EXAMPLE 3 – New construction with 25% complete as of

9/27/17, project 100% complete as of 1/31/18 – Bonus at 40%• 30% Bonus if in 2019



Bonus Depreciation – Reminders:

• Bonus is automatic – you need to elect out of bonus. If youmiss this election, and take regular depreciation, the IRS stillcalculates as if Bonus was taken. This issue can be correctedwith a Form 3115 “Change In Accounting Method”

• You can be “surgical” with the amount of bonus that you deductby electing out by Asset Class (5,7,15, etc.)

• In comparison, §179 allows you to choose which assets to take§179 on – so it is even more precise

• Rev. Proc. 2020-25 – make or revoke bonus depreciationelections



What you need to consider for your 2017 tax filings

Expansion of §179 Expensing• Starting in 2019, the deduction increases the maximum

amount a taxpayer may expense under §179 to $1,020,000and increases the phase-out threshold amount to$2,550,000. (Sec. 179 is indexed for inflation)

• TCJA expands the definition of §179 property to includecertain depreciable tangible personal property usedpredominately to furnish lodging or in connection withfurnished lodging. Great news for Hotel & Apartmentowners!

• Taxpayers may wish to take §179 in excess of current yearincome if deductions can be used in the next few years



§179 Expensing

• An eligible Unit of Property has to be “New to You”. So it can be“used” property

• Must be used at least 50% for business in the first year it is placedin service

• Tangible personal property (& More)• Section 179 cannot create a loss but can carryforward excess 179

taken. Very often overlooked by tax practitioners• You can amend for 179 one way or the other if you guess wrong.

Only election in the code you can amend for until recently that is• Taxpayer and spouse are treated as one taxpayer with regard to

the maximum dollar limit



Definition of qualified real property eligible for §179 expensingincludes any of the following improvements to nonresidential realproperty placed in service after the date such property was firstplaced in service:

• Roofs• Heating, ventilation, and air-conditioning property• Fire protection and alarm systems; and• Security systems• Plus remember, Qualified Improvement Property

qualifies for 179, too!



§179 Expensing• What does NOT qualify

• Building additions or enlargements

• Internal structural components-beams and spandrels

• Elevators

• You can elect to take 179 only on §1245 assets and includeonly §1245 assets against $2.5 million phase-out.

• You can elect to take 179 only on §1250 assets but you mustadd in §1245 assets in determining $2.5 million phase-out



A couple of items to remember

• Sec. 179 is very surgical – you can pick and choose whatassets, or portions of assets, to apply the deduction to.

• The deduction is limited by both the entity’s, and theindividual’s, taxable income (allowing you to be surgical on adifferent level!)

• Sec. 179 can only be taken on an “active trade or business”.For example, a real estate professional can probably qualify –but does a Triple Net Lease qualify as an “active trade orbusiness”?



Tax Consequences of Related Party Leases

Final thoughts• §179

• Watch your limitations• Most states do not decouple

• De Minimis• Watch your limitations ($2,500)• Book must equal tax• No 3115 available• This will reduce 199A asset calculation• No recapture on sale of assets – However, the sale of De Minimis

assets will result in ordinary income.Bonus• Most states decouple• No limitations• 3115 is available



When is the last time the IRS sent you a check for almost $800,000

Cost Segregation StudiesBefore & After the TCJA and CARES Act


• IRS approved method to accelerate depreciationof specific assets

• IRS Tax codes §1245 and §1250• Personal Property & Real Property

We perform Cost Segregation Studies because….A majority of taxpayers under-depreciate their assets

Cost Segregation Studies


Why?

• Rules are very complex• Properly segregating a property is a complex

process, requiring the right combination of know-how:• Tax expertise and familiarity with prior tax

litigation and rulings• Engineering and construction knowledge



• Profitability• Impact of alternative minimum tax• Early disposition• Passive loss limitations• Estate planning• Intent to demolish (95-27)• Impact of 1031 Exchange

Cost Segregation StudiesThings to Consider


Different Types of Property:• 39 year property = structural non-residential

commercial buildings• 27.5 year = structural residential dwellings

(including apartments)• 15 year = primarily land improvements• 5 and 7 year = personal property• & More…

Cost Segregation StudiesThings to Consider


Sample Study

Taxpayer purchases a building for $5,000,000 (net of land) in 2016, and has taken depreciation over 39 years.



Example: 2016 Acquired Building



Example: 2016 Acquisition



60,000300,000450,000

2,190,000$3,000,000

$148,013

$186,030

$253,230 $579,145 $325,915$148,013

Example: 2016 New Construction



60,000300,000450,000

2,190,000

$3,000,000

$ 216,099

$218,492

$349,410 $889,656 $540,246 $ 216,099

Comparison of Acquisition to New Construction –2016Four-year catchup depreciation on Form 3115.Acquisition without bonus, construction with 50% bonus.



Example: 2020 New Construction or Acquisition



60,000300,000450,000

2,190,000

$41,730 $840,463 $798,733

$319,493

$286,264

$3,000,000

What are the benefits of Cost Segregation Studies?• 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



What are the benefits of Cost Segregation Studies?• 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)



What buildings are eligible?• New buildings under construction• Existing buildings undergoing renovation• Purchases of existing properties• Buildings purchased or constructed since 1987• Inherited buildings



Taxpayer Benefits

“Free” immediate tax deductions for writing off improperly capitalized assets.

Includes repair items and structural components

Removing replaced assets off depreciation schedules will reduce depreciation recapture in the future.

Tangible Property Regulations


Tax Asset Detail 1/01/20 - 12/31/20

d Date In Tax Depreciation Accumulated Net Tax Tax TaxAsset t Property Description Service Basis Current Year Depreciation Value Method Period

Group: no cost seg

15 BUILDING INCLUDES ROOF #7 1/01/90 2,000,000.00 46,031.74 1,587,649.00 412,351.00 S/L 31.516 LAND N/A 1/01/90 500,000.00 0.00 0.00 500,000.00 Land 0.017 SEWER REPAIR #184 6/30/95 75,000.00 2,380.95 33,734.00 41,266.00 S/L 39.018 APPLIANCES #206 7/01/99 120,000.00 0.00 120,000.00 0.00 200DB 5.019 NEW ROOF #205 1/01/00 200,000.00 5,128.21 64,318.00 135,682.00 S/L 39.020 BUILDING IMPROVEMENTS #205, #7 7/01/98 600,000.00 15,384.00 223,722.00 376,278.00 S/L 39.021 BUILDING IMPROVEMENTS #205, #7 6/15/04 400,000.00 10,255.00 151,025.64 248,974.36 S/L 39.022 NEW APPLIANCES-NO BONUS #7, #206 11/30/09 230,000.00 26,496.00 190,256.00 39,744.00 200DB 5.023 NEW ROOF #205 12/31/12 300,000.00 7,692.31 11,865.31 288,134.69 S/L 39.0

3,865,000.00 113,368.21 2,382,569.95 2,042,430.05


Tangible Property RegulationsApplying the Capitalization Standards


Summary of Building Examples from the Final Regulations

REPAIR• Roof membrane (Ex. B13)• 3/10 roof units (Ex. R18)• 30% electrical wiring (Ex. R21)• 100/300 windows (Ex.R25)• Floors in lobby (10%) (Ex. R28)

CAPITALIZE• Large portion of roof (Ex. R14)• One chiller HVAC (Ex. R17)• 100% electrical wiring (Ex. R20)• 200/300 windows (Ex. R26)• Floors in all public areas (40%) (Ex.R29)

33% seems to be the “unofficial” bright line - everything does not need to be capitalized. May have previously

capitalized items that now can be written off


Other Opportunities


Other Tax Saving Strategies:• Energy Tax Deductions & Credits

• Section 179D• Section 45L

• UNICAP – not just for inventory• Section 1031 Exchange updates• R&D Credits• Accounting Method Changes - Form 3115

We will help you determine if there are tax savings or refunds available to your clients and prospects.Information Needed: - Most recent TAX Depreciation Schedule- Address

We can send you all of the flowcharts and reference material discussed

Contact Us!


Jeff Hiatt [email protected]

David Fabian [email protected]

Kyle Young [email protected]

http://www.costsegs.com/ 508.878.4846

Thank you!


mailto:[email protected]



http://www.costsegs.com/

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