Filling your cost segregation bucket after tax reform

October 3, 2018|Lori Jore

The Tax Cuts and Jobs Act had wide-ranging impact on taxpayers, including how assets are depreciated. Learn how the different buckets of depreciation were affected.

It is being pronounced “Tick’ juh”! It is TCJA, short for the Tax Cuts and Jobs Act, which has been touted as “bold legislation to overhaul America’s tax code for the first time in 31 years.”

What does this mean for real estate? TCJA’s impact on the real estate market will be measured and analyzed in the weeks, months and years to come. It also means your cost segregation and tax depreciation “buckets” are more important than ever!

What is cost segregation?

A cost segregation study provides an analysis of a building’s components and their costs and then shifts these costs into different buckets for tax depreciation purposes. What results is that personal property is identified and then classified separately from the main building systems for tax depreciation purposes. The reclassification, or shifting to other buckets, significantly shortens tax lives of those components and reduces current tax obligations.

What do these buckets do for you?

The buckets help you accelerate depreciation and that means you save more dollars on your taxes today—dollars that you can use to run your business, dollars that you can use to purchase more property, dollars that you can use to take your business to the next level!

Section 179 expensing bucket

The section 179 expensing bucket just got a lot bigger! The section 179 expense allowance increased to $1 million, and the phase-out threshold increased to $2.5 million of asset purchases for the 2018 tax year. These were $510,000 and $2.03 million respectfully, prior to TCJA.

If you want to take advantage of the larger “179 expensing” bucket, you will want to know about the expanded list of applicable items:

  • Tangible personal property. Tangible personal property might include things such as cabinetry, dock seals and manufacturing equipment. Prior to TCJA, tangible personal property excluded certain tangible personal property used predominantly to furnish lodging (such as rental real estate, but does not include hotels, etc.). With TCJA, tangible personal property now includes certain tangible personal property used predominantly to furnish lodging.
  • Qualified improvement property. The rules about what is categorized as “qualified improvement property” have changed, but the group is still included in the 179 expensing bucket.
  • Additional qualifying items. New with TCJA, improvements made to commercial nonresidential roofs, HVAC, fire protection, alarm systems and security systems also qualify for the 179 expensing bucket.

100% bonus depreciation bucket

The bonus depreciation bucket also got a lot bigger! Prior to TCJA, bonus depreciation was at 50%. TCJA increased bonus depreciation to 100%! Bonus depreciation at 100% is just a fancy way to say that you can take an immediate write–off of the entire asset.

Since it’s so beneficial, you will want to know what you can put in the “100% bonus depreciation” bucket. Prior to TCJA, the bonus depreciation bucket included only new property and land improvements with recovery periods of less than 20 years. New with TCJA, the bonus depreciation bucket now also includes used property and land improvements with recovery periods of less than 20 years!

IRS Code Section 1031

While not necessarily a “bucket,” it is important to note that the benefits of combining cost segregation and Section 1031 exchanges have become an even more important tax strategy with TCJA. Opportunities for deferral of gain under Code Section 1031 are now limited to like-kind exchanges of real property only and can no longer be used for personal property. While tangible personal property is no longer eligible for deferral, the potential for full expensing of replacement tangible personal property may offset the negative impact of eliminating gain deferral under Code Section 1031. A cost segregation study can help identify the tangible personal property that may be eligible for full expensing and therefore offset the negative impact of the gain deferral elimination.

Schenck can help you understand how the new tax laws affect your tax depreciation strategy and ensure your assets are in the right buckets.

Watch this video for a brief summary of how the Tax Cuts and Jobs Act impacts the real estate industry. Or, read about how a cost segregation study can impact multifamily property owners in light of tax reform.

To learn more about how a cost segregation study could benefit you, contact us or reach out to Lori Jore, cost segregation manager at Schenck, at 920-996-1289 or lori.jore@schencksc.com.


Lori Jore, PMP, PE, has more than 20 years of experience as an engineering professional, working with small, mid-sized and large companies to design processes and manage projects. Her experience includes providing facility- and process-related cost segregation services, energy analysis, simulation, and energy benchmarking services.