A new corporate tax bill signed by President Bush in late October offers major tax savings for owners of commercial property, but will expire a little more than a year from now.
The omnibus bill known as H.R. 4520, or the American Jobs Creation Act of 2004, has many provisions, and one of these permits owners to depreciate tenant improvements over a 15-year period rather than over a 39-year period. The bill's author was Rep. Clay Shaw, R-Fla.
According to the Real Estate Roundtable, a trade group that lobbied hard for the provision, the savings can be dramatic. For example, imagine the case of an office lease of 10,000 square feet, and a rent of $35 per square foot with $50 per square foot budgeted for tenant improvements.
Under the old formula, the landlord with a 35 percent tax rate would be permitted to claim a depreciation deduction of $12,821 annually. This translates into a tax savings of $4,487.
Under the new 15-year schedule, however, that same landlord/owner would be eligible for an annual deduction of $33,333, amounting to $11,667 in tax breaks.
"It's a good start," said Craig Benedetto, legislative director of the Building Owners and Managers Association-San Diego. "Most leases are five years, which means you are generally having to do new improvements for a new tenant or an existing tenant when the lease is up. It is especially important when you consider what tenant improvements consist of these days. You have walls, doors, HVAC systems ... all the things in modern buildings that are a lot more expensive."
Commercial building owners universally seem to like the 15-year provision because it is much closer to actual lease periods. They might like this plan better if the depreciation period were five or 10 years, but all seem to agree that the new depreciation schedule is a whole lot better than nothing.
"If you can only depreciate 1/39th per year, that's a lot different than 1/15th per year," Benedetto said. "This was one of the key issues that BOMA took up this year."
Benedetto said the national BOMA organization worked hard to get the act passed and expects the organization will be willing to roll up its sleeves again when it comes time to make the changes permanent.
"We're still working to permanently alter the time, but the tax code is something that is very difficult to change," Benedetto said.
Ideally, Benedetto might like to see a five- to 10-year depreciation schedule to directly coincide with common lease terms, but said he'd take what he can get.
There are exemptions to the tax break, not the least of which is the fact the building must have been around for no less than three years prior to the new improvements to the deduction. Commercial property owners also must have retained ownership of a building through the calendar year to claim any deduction.
The benefits also extend to restaurant properties, but they are treated a little differently. In those cases, where the three-year provisions also apply, the depreciation schedule only applies if at least 50 percent of the restaurant space is dedicated to food preparation and seating.
The bill took effect when the president signed it on Oct. 22. It is, however, only temporary legislation that will sunset Jan. 1, 2006, without an extension by Congress.
This is the second bit of good news commercial property owners have had in the past 18 months. Under the 2003 tax law, improvements can be deducted for depreciation at a rate of 50 percent in the initial year, up from 30 percent previously. That is applicable to improvements begun after May 5, 2003, and completed prior to Jan. 1, 2005.
In short, for now at least, commercial property owners may be benefiting from two major tax breaks at once.
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