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Qualified Real Property Expensing for Year End Equipment Purchases

Today we are continuing to look at year-end tax planning as it relates to purchases of equipment and this week we are examining qualified real property expensing.

This may be the last year that a unique combination of tax breaks is available for these three categories of real estate assets:

  • Qualified leasehold improvement property

  • Qualified restaurant property

  • Qualified retail improvement property

If you are thinking about making improvements, the time to act is now. Make sure the assets are placed in service before 2014 or you may miss out on several tax deductions. Unless Congress acts, after 2013 you could lose out on qualified real property expensing, 50% bonus first-year depreciation, and a quick, 15-year depreciation period for that part of the cost that isn't expensed or eligible for 50% first-year bonus depreciation.

Historically, Code Sec. 179 expensing has been available only for tangible personal property, but there's a limited-time-only exception for certain types of real property. Specifically, for any tax year beginning in 2010, 2011, 2012, or 2013, a taxpayer may elect to treat up to $250,000 of qualified real property as Code Sec. 179 property. Otherwise eligible property placed in service in tax years beginning after 2013 won't be eligible for this tax break, unless Congress acts to extend it.

Qualified real property is:

  • Qualified leasehold improvement property described in Code Sec. 168(e)(6)

  • Qualified restaurant property described in Code Sec. 168(e)(7)

  • Qualified retail improvement property

In general, qualified leasehold improvement property includes interior improvements to a building if:

  • The improvement is Code Sec. 1250 property

  • The improvement is made, “under or pursuant to a lease,” either by the lessee, sublessee or lessor of the building portion

  • The portion of the building is to be occupied exclusively by the lessee (or any sublessee) of the portion

  • The improvement is placed in service more than three years after the date the building was first placed in service

Property is qualified restaurant property if it is any Code Sec. 1250 property which is a building or an improvement to a building, if more than 50% of the building's square footage is devoted to preparation of and seating for on-premises consumption of prepared meals.

Qualified retail improvement property is any improvement to an interior portion of a building that is nonresidential real property if:

  • That portion is open to the general public and is used in the retail trade or business of selling tangible personal property to the general public.

  • And the improvement is placed in service more than three years after the date the building was first placed in service.

The pre-tax limitation is $250,000 on the aggregate cost of qualified real property that may be treated as Code Sec. 179 property, which is a part of the $500,000 limit for all Section 179.

Additionally, the reduction in the overall $500,000 limitation on expensing starts to take effect when property placed in service in a tax year exceeds $2,000,000.

Disclaimer: The items included in the Tax Tip Tuesday Video Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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