Opportunities from the New Qualified Improvement Property Category
The American Jobs Creation Act (AJCA) was signed into law in October of 2004. One of the provisions of the law allowed for a quicker recovery of costs for the improvement of leased nonresidential real property over 15 years rather than 39 years. Lessees, sublessees and lessors making improvements to the interior portion of the nonresidential property could use the shorter recovery period as long as certain qualifications were met:
- The improvement was made under, or pursuant to a lease
- The improvement is section 1250 property (i.e. a structural component), and not section 1245 personal property that is eligible for a shortened recovery period)
- The lease was not between related persons
- The interior portion of the building was to be occupied exclusively by the lessee or any sublessee of that interior portion
- The improvement was placed into service more than three years after the date the building was first placed into service
Initially set to expire in 2006, several extenders kept the shorter recovery period in place, until the Protecting Americans from Tax Hikes Act of 2015 or PATH, made the 15-year straight-line recovery permanent for tax years beginning after December 31, 2015.
In addition, the PATH Act also created a new category of 39-year property subject to bonus depreciation. The category is called “Qualified Improvement Property” or QIP. QIP is defined as any improvement to the interior of a nonresidential real property that is placed in service after December 31 st , 2015. QIP is similar to the Qualified Leasehold Improvement with a few important exceptions.
- QIP does not require the building to have been placed in service for at least 3 years prior to the expenditure.
- QIP does not require landlord and tenant to be non-related parties.
- Improvement does not have to be made pursuant to a lease.
Starting 2016, a taxpayer can take bonus depreciation for improvements made on 39-year nonresidential real property, as long as:
- The improvement was placed in service after the building was first placed into service,
- It is not an expansion/enlargement,
- It is not elevator or escalator or
- It is not improvement made to the internal structural framework.
Qualified Improvement Property is not eligible for Section 179 unless it also meets the definition of a Qualified Leasehold Improvement, Qualified Retail Improvement, or Qualified Restaurant Property. The following example illustrates the application of the newly created category rules:
An owner of land constructs a new building that is placed in service in 2015. The building is then leased out to a tenant in 2016, and the tenant makes qualifying improvements to the interior of the building. These improvements do not include any expansion or enlargement, it is not an elevator or escalator and it is not an improvement made to the internal structure framework. The improvements are not qualified leasehold improvements because the building is not at least 3 years old and consequently, are not depreciable over 15 years but rather 39 years. However, these improvements are qualified improvement property, which qualify for the 50% bonus depreciation in 2016 when placed in service. This assumes all other requirements for claiming bonus depreciation are met.
At WNDE, our tax professionals have extensive experienced serving businesses and individuals who own or lease nonresidential commercial real estate. To discuss how QIP and other strategies may offer tax planning opportunities that could be beneficial to you, please contact your WNDE tax professional.