KROST Quarterly Magazine: The Real Estate Issue - Volume 2, Issue 1

VOLUME 2, ISSUE 1

KROST QUARTERLY M A G A Z I N E

THE REAL ESTATE ISSUE The Impact of TCJA on

COST SEGREGATION & LIKE-KIND EXCHANGE

SECTION 45L TAX CREDITS Accounting for Qualified Opportunity Zone Funds

UPDATES TO QUALIFIED IMPROVEMENT PROPERTY

So Sum Lee, CPA

leads the Real Estate industry group at KROST WWW.KROSTCPAS.COM

KROSTCPAs.com

Volume 2, Issue 1 / January 2019 Offices Pasadena Headquarters 790 E. Colorado Blvd. Suite 600 Pasadena, CA 91101 Woodland Hills Office 21800 Oxnard Blvd. Suite 1040 Woodland Hills, CA 91367 Valencia Office 26650 The Old Road, Suite 216 Valencia, CA 91381 West LA Office 6100 Center Drive Suite 950 Los Angeles, CA 90045 Phone: (626) 449-4225 Fax: (626) 449-4471 Principals Gregory A. Kniss, CPA Managing Principal Jean Hagan Principal - Business Management Lou Guerrero, CPA, MBT Principal - Tax Practice Leader Jason C. Melillo, CPA Principal - Assurance & Advisory So Sum Lee, CPA Principal - Tax Production, Copy, and Design Bethany Wolfe, Editor in Chief Anna Chen, Editor Rebecca Hickle, Editor Ellen Reynerson, Graphic Designer Diana Vu, Marketing Coordinator

CONTENTS

4 6 8 11 14 16

The Impact of TCJA on Cost Segregation & Like-Kind Exchange

By So Sum Lee, CPA

Can OZ Work for You? Accounting for Qualified Opportunity Zone Funds

By Keith Hamasaki, CPA

Section 45L Tax Credits: The Most Overlooked Tax Credit for Residential Developers Guest Contributor: Brandon Val Verde

Investor Alert: If You Have Not Heard of DSTs, Time to Take a Look

By Jonathan Louie, CPA

Client Spotlight: Mamal Moinpour

By Jonathan Louie, CPA

Updates to Qualified Improvement Property Guest Contributor: Harry Sahi

Inquiries can be sent to: admin@KROSTCPAs.com Stock Photography Adobe Stock - Used with permission Copyright Š 2019 by KROSTCPAs.com All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law.

THE REAL ESTATE ISSUE KROST Quarterly is a digital publication released by KROST CPAs & Consultants headquartered in Pasadena, California. Established in 1939, this full-service Certified Public Accounting and Consulting firm serves clients across a variety of industries. With a focus on recognizing opportunities and creating value, KROST equips clients with tools to make better business and financial decisions for the future.

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INTRODUCING KROST’S REAL ESTATE TEAM So Sum Lee, CPA is a Principal at KROST. She has 20 years of experience in public accounting and has a wide range of experience in Auditing, Accounting, and Taxation, and is also the head of our Real Estate industry niche.

So Sum has a degree in Business Economics with a minor in Accounting from the University of California, Los Angeles. She is also a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.

MEET SO SUM

Our team produces regular KROST Insights posted to our website. This issue will highlight some of the hot topics in real estate including Opportunity Zones, Delaware Statutory Trusts, Cost Segregation, 1031 Exchange, Green Building Tax Incentives, and Qualified

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KROST QUARTERLY VOL. 2 ISSUE 1 - THE REAL ESTATE ISSUE

Greg Kniss, CPA Managing Principal

REAL ESTATE Team at KROST 360° Service Model

Lou Guerrero CPA, MBT Principal - Tax

Jason C. Melillo, CPA Principal - Accounting

• • • • • • • • • • • • • •

Accounting Assurance & Advisory Cost Segregation Cybersecurity Assessment or Compliance Fixed Asset Depreciation Review IC-DISC Internal Control Review & Procedural Reviews Management Information Systems Mergers & Acquisitions Outsourced Accounting R&D Tax Credits Tax Planning & Consulting Technical Guidance Advisory & Implementation Wealth Management

Experience You Can Trust Our Sector Expertise So Sum Lee, CPA Principal - Tax

Keith Hamasaki, CPA Director - Assurance & Advisory

Jonathan Louie, CPA Manager - Tax

• • • • • • • • • • • • • • •

1031 Exchange Consulting & Compliance Cost Segregation Studies & Consulting Delaware Statutory Trust & 1031 Exchanges Federal & State Tax Compliance Financial Modeling Green Energy Tax Incentives (45L & 179D) Internal & External Audits Internal Controls Consulting International Tax Planning Opportunity Zone Funds Outsourced Financial Reporting Property Tax Compliance & Consulting Risk Management Sales & Use Tax Studies & Compliance Tax Planning Strategies

“The experienced, multi-disciplined teams at KROST can provide services for very specific needs relating to real estate, as well as a holistic approach to tackling multiple challenges as a true partner in the development of your business.”

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The Impact of TCJA on Cost Segregation & Like-Kind Exchange

By So Sum Lee, CPA Principal - Tax

L

ike-kind exchange has been a popular tax deferral tool for decades. Under IRC 1031, a taxpayer can defer tax on gain from the sale of a business or investment property if it is exchanged for like-kind property. Real property is generally likekind to all real property while personal property has slightly more stringent requirements. In terms of like-kind exchange, it is generally accepted that the definition of real property by state law is followed. As such, fixtures identified under cost segregation, though being depreciated under Section 1245 as personal property, are still considered real property for IRC 1031 purposes. With the implementation of new tax laws under the Tax Cuts and Jobs Act (TCJA), the definition of real vs. personal property quickly became a heated debate amongst experts. Many were left wondering what impact the Tax Cuts and Jobs Act had on Cost Segregation and 1031 Exchange.

Like-Kind Exchange The concept of tax-deferred, like-kind exchange dates back to the 1920s. However, the present-day definition of like-kind exchange was introduced in the 1950s. Pursuant to IRC 1031, a taxpayer can defer tax on gain from the sale of a business or investment property if it is being exchanged for like-kind property. Both personal and real property qualified for tax deferral treatment under pre-2018 IRC 1031. Real property is generally like-kind to all other real property whether or not improved. Personal property must be of like-kind and like-class in order to qualify for tax-deferral treatment. When exchanging multiple properties, Reg. 1031(j)-1 requires taxpayers to group multiple properties into exchange groups of like-kind or like-class. Gain or loss is then calculated for each exchange group.

Cost Segregation Studies The primary goal of cost segregation is to identify all property-related costs that can be depreciated faster (typically with a 5, 7 or 15-year tax life). The secondary goal (as a result of the more recently issued Tangible Property Regulations) of cost segregation is to establish the depreciable tax value for each major building component that is likely to be replaced in the future. Examples include the roof, windows, doors, bathroom fixtures, HVAC, and so on. When a component is replaced, the tax preparer needs this information to claim a “retirement loss” or “partial disposition” deduction for the remaining depreciable basis left on that component.

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A cost segregation study is also a natural launch point for exploring other related opportunities such as assessing the potential for deducting current year repairs, retirements, and removal costs; identifying special property like Qualified Leasehold Improvements, Qualified Retail Improvement Property, Qualified Restaurant Property, and Qualified Improvement Property; as well as discovering green building deduction and credit opportunities.

Interaction of Cost Segregation with Like-kind Exchange Although the TCJA removed personal property from qualifying for IRC 1031, Footnote 726 of the Committee Report states “It is intended that real property eligible for like-kind exchange treatment under present law will continue to be eligible for like-kind exchange treatment under the provision.” Given this clarification, we believe that Congress intended the treatment under pre-TCJA law regarding real property exchange to continue to apply.

The IRS has taken the position that federal income tax law, rather than state law, controls whether exchanged properties are of like-kind for IRC 1031 purposes. All facts and circumstances should be considered in determining whether properties are of the same nature and character. However, despite the fact that generally, state law does not control the definition, there have been several court cases in which state laws have been respected. In Morgan v. Commissioner 309 U.S. 424 (1940)1, the Supreme Court deferred to state law to determine the classification of property rights as real or personal. In Commissioner v. Crichton, 122 F.2d 181 (1941)2, the 5th Circuit Court determined that a mineral right was real property under Louisiana state law and therefore was of like-kind to other real property. In Peabody Natural Resources Co v. Commissioner, 126 T.C. 261 (2006)3, the Tax Court determined that coal supply contracts constituted real property interests under New Mexico law and therefore were of like-kind to a gold mine.

Depreciation classification plays no role under state law in determining whether a property is real or personal “It is intended that real property eligible property. Fixtures such as wall coverings, carpeting, and special purpose wiring affixed to the building are for like-kind exchange treatment under considered real property under state law. However, this present law will continue to be eligible for property can be depreciated under IRC 1245 as personal like-kind exchange treatment under the property even though under state law such property is considered real property. Further, Reg. 1.263A-8(c)(1) provision.” provides that real property includes land, unsevered natural products of land, buildings and inherently permanent structures, such as walls, partitions, doors, wiring, plumbing, central air conditioning and heating systems, pipes and ducts, elevators and escalators, and other similar property. Reg. 1.263A-8(c)(3) further provides that inherently permanent structures include property that is affixed to real property and that will ordinarily remain affixed for an indefinite period of time. Property may constitute an inherently permanent structure even though it is not classified as a building for purposes of former section 48(a)(1)(B) and §1.48-1. We believe the portion of the building cost that is segregated out and depreciated under Section 1245 will fit into this category.

While we believe that TCJA would not impact the 1031 exchange treatment for real estate as it is now, there are some considerations to make when paring cost segregation with like-kind exchange. For example, tax preparers should be aware of different property groups and values to avoid 1245 and/or 1250 recapture. An experienced advisor will know how to navigate these complexities and provide guidance for those looking to utilize this sophisticated tax strategy. For more information on cost segregation studies and 1031 exchanges, contact us today to speak to one of our subject matter experts.  1

CONTACT SO SUM 

2

Morgan v. Commissioner of Internal Revenue, 23 AFTR 1046 (60 S.Ct. 424), Code Sec(s) , (S Ct) , 01/29/1940 Commissioner of Internal Revenue v. Crichton, 27 AFTR 824 (122 F.2d 181), Code Sec(s) , (CA5), 08/09/1941 3 Peabody Natural Resources Company, et al. v. Comm., 126 TC 261, Code Sec(s) 1031.

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CAN OZ WORK FOR YOU? Accounting for Qualified Opportunity Zone Funds

By Keith Hamasaki, CPA Director - Assurance & Advisory

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f you’ve ever wanted to help revitalize an economically distressed community but couldn’t justify it economically to generate enough capital from investors, then the new Opportunity Zone Program may be the right answer for you.

What is the Opportunity Zone Program?

As part of the 2017 Tax Cuts and Jobs Act (TCJA), the Opportunity Zone Program was established, which allowed state governors to designate certain areas as Opportunity Zones. A map of the California designated Qualified Opportunity Zones1 is available online.2 Participants can potentially pay little to no tax on capital gains resulting from the sale of property, so long as they 1) invest the proceeds within 180 days in a Qualified Opportunity Fund 2) have the fund hold at least 90% of their assets in Qualified Opportunity Zone Property 3) have the Fund hold the assets for at least 5 years.

Simply put, an investment in a Qualified Opportunity Fund has the potential to have NO capital gains taxes on any appreciation of the Fund if certain requirements are met.3 Investors who meet the above qualifications in investing in their realized capital gains into Qualified Opportunity Funds must do so for at least 5 years to receive the minimum benefit, but should consider investing for at least 10 years to secure the maximum benefit. There is no limit to the amount of realized capital gains that can be invested in the Qualified Opportunity Fund. The only requirements are that the Qualified Opportunity Fund must have at least 90% of its assets within an Opportunity Zone and must meet the Substantial Improvement Test. The 90% is determined based on, “the last day of the first 6-month period of the taxable year of the fund, and on the last day of the taxable year of the fund.”

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“Consideration of a Qualified Opportunity Fund requires a high level of accounting expertise that can maintain not only the day-to-day bookkeeping but also track the investments and investor information into the Fund.”

While the exact details of the Substantial Improvement Test are still unknown, that does not mean it is too early to begin considering how utilizing Opportunity Zones can benefit your business.

The Qualified Opportunity Fund is the investment vehicle to invest in Opportunity Zones and to take advantage of the capital gain tax deferral strategies. A significant concept to the Qualified Opportunity Fund is that to qualify the Fund only needs to self-certify by completing a Form 8996. The entity type may either be corporation or partnership providing flexibility to Fund creators.3

Special Considerations to Accounting for Qualified Opportunity Funds Creating a Qualified Opportunity Fund will allow investors and those seeking to defer their capital gains tax to help economically distressed communities and quantitatively prove the investment to be worthwhile. With the decline in traditional Core investing, an investment into a Qualified Opportunity Fund meets the new era model of Build-to-Core.

Consideration of a Qualified Opportunity Fund requires a high level of accounting expertise that can maintain not only the day-to-day bookkeeping but also track the investments and investor information into the Fund. This information will be necessary as the Fund grows and costs must be tracked for the Substantial Improvement Test. Your accountant must have a solid accounting process and policies in place including the ability to track investor contributions, distributions, and capital events.4 

CONTACT KEITH 

2

1 U.S. Department of the Treasury – Opportunity Zones Resources State of California Department of Finance – Opportunity Zones in California. KROSTCPAs.com/qualified-oz 3 What are Opportunity Zones and How do They Work, Fundrise 4 The Internal Revenue Service - Opportunity Zones Frequently Asked Questions

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SECTION 45L TAX CREDITS:

The Most Overlooked Tax Credit for Residential Developers Guest Contributor: Brandon Val Verde, Senior Manager Green Building Tax Incentives, KBKG

T

he §45L credit is a federal tax incentive for developers of apartments, condos, or spec homes that meet certain energy efficiency standards. Eligible construction also includes substantial rehabilitation.

Section 45L tax credits incentivize real estate developers and investors by allowing a $2,000 business tax credit for each qualifying home they’ve built within the last 4‐5 years. Homes that are leased or sold and part of single‐family or multi‐family developments may qualify. To be eligible for these tax credits, the home must have been built in the United States and must be located within a building that is 3 stories or less above grade in height. The eligible home must also be properly simulated to show a reduction in heating and cooling energy consumption of 50% compared to the 2006 International Energy Conservation Code (IECC). Of this 50% reduction, a minimum of 10% must come from the building envelope.

The building envelope plays an important role as it is made up the construction elements (e.g. walls, floor, roof, windows, etc.) that separate the inside of a home from the outside. Although

Case Study: 60-unit multifamily project in Southern California As required by Title 24 code, the walls, floors, and roofs of each home in the development were well insulated; the windows had high-performance values, and the HVAC systems had high-efficiency ratings.

All 60 homes qualified for the $2,000 tax credit resulting in significant tax credits totaling $120,000 for the developer.

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Section 45L tax credits incentivize real estate developers and investors by allowing a $2,000 business tax credit for each qualifying home they’ve built within the last 4-5 years.

only 10% of the reduction is required to come from the building envelope, the required reduction in energy consumption actually comes from the envelope and Heating Ventilating and Air Conditioning (HVAC) system working together. When a good envelope is in place, the HVAC system doesn’t need to work as hard which results in a higher overall reduction in energy consumption.

Developments in California are typically good candidates since the state has a strict energy code known as Title 24. The code is in place to ensure developments meet the state’s energy-efficient criteria before builders are even allowed to obtain a building permit. Given how stringent California’s code is in comparison to the rest of the country, simply building to the minimum requirements of Title 24 can lead to Section 45L tax credits.

Section 45L tax credits are part of a group of temporary tax provisions that expired or “sunset” at the end of the 2017 tax year. These provisions are called “tax extenders” since they rely on federal legislation for an extension. However, in the more than 13 years that have followed since Section 45L was first introduced, Congress has passed 7 bills into law extending these tax credits through to the end of the 2017 tax year. In the next month, lawmakers will likely be asked to pass a bill extending Section 45L, and several other tax extenders, yet again. Given its history and the tax benefits provided by the $2,000 tax credit per qualifying home, residential developers and investors should plan to take advantage of Section 45L. 

LEARN MORE 

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INVESTOR ALERT:

IF YOU HAVE NOT HEARD OF DSTS, TIME TO TAKE A LOOK

By Jonathan Louie, CPA Manager - Tax

I

n Los Angeles, from September 2007 to May of 2009, the cost of real estate declined by 60%, driving the median home sale price down sharply from $625,812 to $248,851. During that time, many savvy real estate investors took advantage of this opportunity to purchase homes at a discount and turn them into rental properties. As the housing market saw increased growth over the last 10 years, so too, did the cost of rents, which resulted in a compound return of 8.143% since January 2009.

Likely, many of the people who had enough dry powder to take advantage of the investments were in their late working years with the income to take risks in an unknown environment. While Investor Alert: If You Have Not Heard of DSTs, Time to Take a Look others ran for the hills, those individuals, who were prime net In Los Angeles, from September 2007 to May of 2009, the cost of real estate declined by 60%, driving the medianbuilding home sale price downmost sharplylikely from $625,812 to $248,851.

During that time, in many savvy real worth were immune to the changes markets estate investors took advantage of this opportunity to purchase homes at a discount and turn them into and real estate environment and took advantage. rental properties. As the housing marketing saw increased growth over the last 10 years, so too, did the

cost of rents, which resulted in a compound return of 8.143% since January 2009. $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000

As real estate investors near retirement, the looming concern over capital gains becomes more and more relevant. Many of those same savvy investors are opting for 1031 Exchange as they consider liquidating real estate properties to finance their retirement. However, there may be another option to consider that offers unique benefits.

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Median Prices of existing detached homes. California Association of REALTORSÂŽ https://www.car.org/marketdata/data/housingdata/ Median Prices of existing detached homes - California Association of REALTORSÂŽ

Likely, many of the people who had enough dry powder to take advantage of the investments were in their late working years with the income to take risks in an unknown environment. While others ran for the hills, those individuals, who were prime net worth building, were most likely immune to the changes

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Dealing with Capital Gains If an investor sold their property outright and pocketed the gains, they could pay upwards of 20% tax on the capital gains and would have to recognize ordinary income on a portion of the gain for any depreciation that was taken (which could be significant). Many people, especially in Southern California, have opted to do a 1031 Exchange, whereby they exchange one like-kind property for another and defer the capital gains tax. This works well if the property is held until death, allowing the beneficiaries to get a step up in basis when the property passes through their estate.

However, if the taxpayer is looking to diversify their investment portfolio while maintaining their rental income, then investing in a Delaware Statutory Trust (DST) provides a better alternative. DSTs share many of the best parts of the traditional exchange, but with some key differences that may benefit real estate investors for years to come.

What is Delaware Statutory Trust?

A Delaware Statutory Trust is an investment trust created under Delaware law. It is a trust that holds investment real estate and qualifies for tax-free treatment under 1031 exchanges. Here are some of the benefits of a DST:

1. Diversification Many DSTs purchase and invest in a diversified group of properties across similar sectors, multi-family, healthcare, retail, commercial, etc. The DST may also choose to diversify its holdings in multiple states to limit economic and property risk. This allows investors to minimize their risk, leaving them less vulnerable to regional recessions or weather events that could leave investors with significant repair costs and without investment income for months on end.

2. Better Income With increased prices comes lower capitalization rates – or yield. The property rents are likely lower as a percentage of value than they have been in a long time. That means that exchanging for another property could net lower income. DSTs can target growth areas and capitalization rates that may not be readily available to a single investor in their market.

3. Buying Power in Growth Markets Real estate has appreciated to a point where it seems almost silly to invest anywhere else. However, we know that things can, and always do, change. As we age, our risk tolerance will generally decline, favoring more stable investments across many broad asset classes. DSTs combine many investors to pool funds and access higher quality properties and tenants than an individual might find on their own.

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4. Scheduling Safety DSTs could be a great fallback option to include on the 45-day identification letter of your 1031 exchange if the other identified properties fall through. DSTs can close escrow within a few days, so if your first few identified properties fall through in the eleventh hour, then there would still be time to close on the DST to complete the exchange.

5. Debt Matching DSTs can access properties and deals with varying amounts of debt to help ensure that your replacement property has sufficient debt to prevent taxable boot on the exchange. This is important as it will affect the tax implications in the transaction.

6. Ease of Ownership Unlike privately owned properties, DSTs are normally professionally managed properties, underwritten, selected and purchased by a Real Estate Investment Trust (REIT) for use in their portfolios. There is no rent collection, no tenant’s meetings, and little to no effort for the ownership to maintain the property. You simply receive monthly income in your account and thank your broker.

As with any investment and tax planning strategy, there are considerations to make. Seeking advice from your wealth manager or tax advisor will help identify which approach will work best for your situation.2 To find out how you can spend more time enjoying your retirement and less time worrying about the tax consequences of your rental property, please contact us. 

CONTACT JONATHAN  2

Growth in Retiring Baby Boomers Strains U.S. Entitlement Programs - The Wall Street Jornal

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Client Spotlight:

MAMAL MOINPOUR

By Jonathan Louie, CPA Manager - Tax

R

ecently, we had the opportunity to interview one of our tax clients, Mamal Moinpour, who owns real estate in the Greater Los Angeles and across the U.S. He is an expert real estate investor who built his businesses from the ground up, beginning in 1985 with a single lot purchase from a land auction. Mamal now owns dozens of properties and has made the challenging shift from residential to commercial real estate. Here’s what we discussed during the interview:

How did you get started? How did your real estate investment career launch?

Before I came to the US, I was a diplomat in Iran. After realizing what had happened to the country during the post-revolution, I decided to leave. In 1985, I migrated to the United States. I took night classes for business at UCLA, which led me to real estate. Looking to get started in my new career, I scanned the classified ads for land auctions.

The first time I went to an auction there were nearly 4,000 people there! Everyone was bidding. Everyone was a professional. It was overwhelming, so I just watched. The second time I went, I had done my research. I talked to brokers and I understood the lot values. The third time I went, I bid. At that time, my rule was that I would bid $.30 to the dollar as my maximum. I left that day with 14

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one lot. Back then, they [the auctions] used to finance the deal as well, so I only needed 10% down. This was on a Sunday. By Monday, I had put that lot on the market.

Since I was selling it at almost half the valued price, the lot sold quickly within 2-3 months. When I returned to the auction, I could buy 2 lots. I got to a stage where I wanted to buy a condo for myself, but instead of buying one, I decided to purchase an entire building, this way, I could receive rental income and have my tenants pay the mortgage. Eventually, I was able to buy several apartment buildings, and the rest is history.

How did you get into commercial real estate?

As I continued my career in real estate, I ended up getting my broker license, then got certified in appraisal and real

estate finance. Once I knew what I was doing, it was about finding the right opportunities. I had to learn on my own what opportunities were good or not. The end of the 1970s was challenging for apartment building owners due to rent control, so they were willing to give the buildings up. By 1988, section 8 raised the rent on tenants in Santa Monica, where all of my buildings were located. CostaHawkins law made it so that when a unit became vacant, you could raise the rent to the market. This changed my cash flow and allowed me to refinance and purchase more buildings. Those buildings required crews and staff to maintain, creating too much work for any one person to handle. This was when I shifted my strategy toward investing in commercial real estate. I did my research. I checked restaurants, conveniences stores, gas stations, and each option had issues until I came across drug stores.

I bought my first Rite Aide in Victorville, California.

As far as Cost Segregation and 1031 Exchanges, how did you figure out these sophisticated tax strategies?

With apartments, I had to keep track of and report all of my income and expenses to the IRS. With commercial, I would get a 1099 and the only expense I had was the mortgage since I would invest in triple net lease properties in which the tenants would pay the property tax, insurance, and maintenance. I thought to myself, there is something I do not know about this. What is it that I do not know?

What is it that smart people do to reduce their tax bill?

I reached out and asked as many people as I could, and many would not tell me. They didn’t want to share the information, but finally, someone did. The secret was cost segregation. I called a few CPAs and started performing cost segregation studies on my properties. Realizing the opportunity, I gradually sold my prior investments and moved into what I do now: investing in commercial real estate properties that have pharmacy tenants. Over time, I learned how to maximize my cost segregation and 1031 exchange benefits. I picked new construction. I started to realize that the value was in the building instead of the land. I began to look for triple net leases, where the tenant takes care of the expenses. I learned everything I could about this new strategy.

How did you get introduced to KROST? The first cost segregation I did with another accounting firm. In 2011, I was audited and after over a year-long process, it turned out that the IRS owed me money! My accountant was not utilizing the cost segregation tax

deductions properly because they did not specialize in real estate. I quickly realized that they were not familiar with this tax strategy, and they were not doing it right. They outsourced the work to another firm and didn’t file the final report correctly. I called different CPAs and finally received the name of someone who worked at KROST and had the opportunity to meet them at a conference in Las Vegas. There I learned that they performed the studies inhouse and had the expertise to file correctly.

Why do you continue to partner with KROST? What’s the value difference?

All that time I was searching for the right firm to perform the studies, many of the CPA firms were using KROST. I decided to work directly with the source. The switch was painless. Working with professionals who knew what they were doing and specialized in my industry. That’s the value difference.

Mamal in front of one of his commercial properties.

Do you have any advice or insights for newcomers in this space?

Find the right experts to advise you. I have an attorney.

He works for a firm in Chicago that used to work at the Walgreens legal department. They understand the leases and technicalities. I went to the people that know cost segregation. Not a guy who knows a guy. I go right to the source. Research. Find out if the locations are profitable.

Get to know the right people and find out the inside details.  KROST QUARTERLY VOL. 2 ISSUE 1 - THE REAL ESTATE ISSUE

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Updates to QUALIFIED IMPROVEMENT PROPERTY Guest Contributor: Harry Sahi, Manager Cost Segregation Services, KBKG

W

ith the 2017 tax year behind us, tax professionals are laser-focused on the various new rules presented by the recent Tax Cuts and Jobs Act (TCJA) effective for the 2018 tax year. One of the most significant changes related to real estate improvements is the new eligibility criteria for qualified improvement property (QIP). The new law eliminates depreciation categories for qualified leasehold improvements (QLI), qualified restaurant property (QRP), and qualified retail improvement property (QRIP). Only qualified improvement property (QIP) remains.

Qualified Improvement Property – Technical Error in the Law Prior to the TCJA, Qualified Improvement Property was eligible for 50% bonus depreciation. The published committee reports indicate that Congress intended to provide both a 15-year recovery period and 100% bonus depreciation for QIP placed in service after 2017. The drafters of the actual legislation tied bonus eligibility to property with a recovery period of 20 years or less. However, in their haste to push the law through they failed to also specify the intended 15-year recovery for QIP. The result is that beginning with 2018, QIP retains its 39-year recovery period and loses bonus treatment altogether. This also means that QIP retains its current 40-year Alternative Depreciation System (ADS) recovery period rather than the ADS switching to a 20-year recovery period.

The IRS must rely on the existing law as written and does not have the authority to correct these obvious drafting errors.

Further, tax professionals should not assume technical corrections will occur before they need to prepare returns for the 2018 tax year. For now, QIP placed in service after 2017 is recovered over 39 years (40 years under ADS) with no bonus depreciation eligibility.

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KROST QUARTERLY VOL. 2 ISSUE 1 - THE REAL ESTATE ISSUE

Insight: Most tax professionals expected the release of technical corrections for multiple issues, including Qualified Improvement Property, before the end of 2018. However, the politics of passing corrections is complicated requiring bipartisan support from both Republicans and Democrats in Congress. There is speculation this could happen during the upcoming lame-duck session, but given the current political climate in Washington there is no certainty it will ever happen.

Other Bonus Depreciation Considerations The bonus depreciation rate was increased to 100 percent through 2022, after which it will decrease 20 percent each year. Notably, bonus depreciation is now available for used property acquired after September 27, 2017. To be eligible to claim the bonus, the taxpayer must not have owned or leased the property prior to the acquisition. Also, it must not have been acquired from a related party, a component member of a controlled group, or in certain carryover transactions. Finally, bonus depreciation is not available to certain taxpayers with floor plan financing (e.g., used for motor vehicles, boats, and farm machinery). Therefore, many auto dealers will not benefit from bonus depreciation.

Section 179 Qualifying property eligible for Section 179 expensing now includes roof systems, HVAC systems, fire protection and alarm systems, and security systems, providing these improvements are made to non-residential real property and placed in service after the building was first placed in service.

Section 179 expensing was also expanded to include tangible personal property used in association with furnish lodging, such as furniture and appliances in hotels, apartment buildings, and student housing. After 2017, Qualified Improvement Property is eligible for Section 179 expensing.

Qualified Improvements - Depreciation Quick Reference Chart KBKG’s Qualified Improvements - Depreciation Quick Reference Chart (updated 03-02-18) consolidates these rules into a simple reference table that tax professionals can use to maximize deductions. You can download the Qualified Improvements Quick Reference Chart for an easy-to-use resource reflecting these new changes for free. 

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KROST QUARTERLY VOL. 2 ISSUE 1 - THE REAL ESTATE ISSUE

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K R O S T C PA S . C O M

KROST QUARTERLY MAGAZINE

With 80 years of experience, KROST has assisted businesses and individuals reach their financial goals through their in-depth knowledge of Tax, Accounting, Assurance and Advisory, M&A, and Wealth Management Services. KROST also provides specialty tax services such as Cost Segregation Studies, R&D Tax Credits, Green Building Tax Incentives, Repair vs. Capitalization, Fixed Asset, IC-DISC, and more.

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