MenuClose

The CARES Act and Its Impact on Real Estate Investors

March 31, 2020


The $2 trillion-dollar stimulus package, the “CARES Act”, signed into law by President Donald Trump on March 27, 2020 contains some valuable tax relief for real estate investors.

On page 203 of the CARES Act, Congress included a $170 billion economic life-preserver for real estate and other investors by modifying Section 461(l) of the Internal Revenue Code.

The CARES Act amendment allows real estate and other investors to write down a depreciation on non-business profits beyond the previous limit of $500,000 per year for married taxpayers filing jointly. It has been estimated to be the second-largest carveout in the CARES Act, after direct loans to troubled industries.

By way of background, in 2017, the Tax Cuts and Jobs Act (the “TCJA”) allowed investors to use depreciation to protect the first $500,000 of a married couple’s capital gains accrued through investments made during that current year. The CARES Act puts these limits on hold for three years, this year and two retroactive years. This could prove to be a way for couples with more than $500,000 in capital gains or income derived from sources other than their business to potentially face no tax liability for this year and the previous two years, provided depreciation and other business losses equal or exceed those capital gains.

For real estate companies, the CARES Act also implements a long-sought fix to the tax code necessitated by changes made in 2017 by the TCJA. Since the TCJA was enacted, various real estate groups have sought revision of the portion of the TCJA that inadvertently denied them and similar taxpayers the ability to claim bonus depreciation deductions related to “Qualified Improvement Property.” “Qualified Improvement Property” is defined in Section 168(k)(3) of the Internal Revenue Code as “any improvement to an interior portion of a building that is non-residential real property, as long as that improvement was first placed in service by the taxpayer.” This so-called “retail glitch” subjected certain restaurants and retail businesses’ qualified improvement property to a 39-year depreciation schedule and disqualified real estate improvements from the TCJA’s 100-percent bonus depreciation system.

The CARES Act fixes that glitch by amending certain provisions of Section 168 and classifying qualified improvement property as either 15-year or 20-year property, and making the property eligible for 100-percent bonus depreciation. What the change means is that businesses making improvements to their real property can immediately write off the costs of such improvements.

Montgomery McCracken attorneys are available to assist clients with numerous issues related to COVID-19. Visit the firm’s Coronavirus (COVID-19) Resource Center for more information and updates on this constantly evolving situation.