2021 real estate tax issues

© MS Consultants, LLC 2021

2021 Real Estate Tax Issues

Jeff Hiatt

Kyle Young


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


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.


➢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)



Pre-Game

Caution:

• This is not law yet but…


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


Pre-Game – Revenue Generators

➢ via WhiteHouse.gov


Pre-Game – Penn Wharton Model


• 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


• 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



• § 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



• 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



• 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



• IRS approved method to accelerate

depreciation of specific assets

• IRS Tax codes §1245 and §1250

• Personal Property & Real Property

Cost Segregation Studies


Sample Study

Taxpayer purchases a building

for $2,000,000 (net of land) in

2016, and has taken depreciation

over 39 years.



➢ Example: 2016 Acquisition

$2,000,000



$2,000,000

$232.940




40,000

160,000

260,000

1,540,000$2,000,000

$232,940




$439,332



40,000

160,000

260,000

1,540,000$2,000,000

$232,940


$206,392



$439,332

40,000

160,000

260,000

1,540,000$2,000,000

$232,940


$90,949



$90,949

$206,392$439,332

40,000

160,000

260,000

1,540,000$2,000,000

$232,940


$105,202



$90,949

$90,949

$206,392$439,332

40,000

160,000

260,000

1,540,000$2,000,000

$232,940


➢ Example: 2016 New Construction


$122,091

$2,000,000

$124,400

$306,408

$539,348

40,000

160,000

260,000

1,540,000

$232,940

$ 124,400


Five-year catchup depreciation on Form 3115. Acquisition

without bonus, construction with 50% bonus.

Comparison of Acquisition to New Construction – 2016



$27,820 $481,421 $453,601 $ 181,441

$181,441

$162,570

➢ Example: 2021 Acquisition or Construction


$2,000,000

40,000

160,000

260,000

1,540,000


Real Property: 27.5 or 39 Year (Structural Components)

➢HVAC units

➢Ceramic tile floors

➢Exterior doors

➢Windows

➢Interior plumbing

➢Siding

➢Concrete flatwork & foundations

➢Roof



HVAC Units

Ceramic Tile

Siding

Concrete flatwork

& foundations

Exterior Doors

& Windows

Roofs

Interior Plumbing


Real Property: 27.5 or 39 Year (Structural Components)


➢Removable site improvements

➢Certain site utilities & drainage

➢Fencing & gates

➢Site paving

➢Landscaping

➢& More

15 Year (Land Improvements)



Sidewalks, Steps

and Curbing

Retaining Walls

Trees, Landscaping

& Irrigation

15 Year (Land Improvements)


Grid Striping and

Pavement Symbols

Paving

Site Lighting

& More


➢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)



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)



➢ New buildings under construction

➢ Existing buildings undergoing renovation

➢ Purchases of existing properties

➢ Buildings purchased or constructed

since 1987

➢ Inherited buildings


What buildings are eligible?


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%


How much can be reclassified?


• Profitability

• Impact of alternative minimum tax

• Early disposition

• Passive loss limitations

• Estate planning

• Intent to demolish (95-27)

• Impact of 1031 Exchange


Things to Consider


➢ 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?


➢ 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 are the Benefits?


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.

+ =


§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


§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



➢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



➢Available for any dwelling (residential

unit) of 3 stories or less:



➢§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



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.


§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


§45L Case Study


§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


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


➢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?


§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….


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


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


§179D for architects and designers

Public Schools

Courthouses

Libraries

Municipal Buildings

… & more!


§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)


§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


§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.


➢Office Building

➢New construction

➢Placed in service – 2021

➢120,000 square feet

§179D Case Study 1 – Full Qualification



Office Building

© MS Consultants, LLC 2021*Energy use includes both electric and gas using Btu-kWh conversion for calculation purposes

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



➢ 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)


➢ 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)


What is Qualified Improvement Property

(QIP)


Questions?

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508-878-4846

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Thank you for listening!

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2021 real estate tax issues

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