Policy Issues

Nonresidential interior improvements should be subject to a 15-year recovery period and bonus depreciation (or a 20-year recovery period for a real estate business that elects out of the new business interest limitation).  A drafting mistake in the Tax Cuts and Jobs Act means such costs are subject to a 39-year or 40-year recovery period.  A technical correction is needed, and The Real Estate Roundtable is working with other industry groups to advance a legislative fix by urging members of Congress to correct a mistake in the 2017 tax reform law that lengthened the cost recovery period for qualified improvement property (QIP).

During the drafting of TCJA, an unintended error resulted in a 39- or 40-year cost recovery period for most improvements to the interior of nonresidential real estate (a new and expanded category that previously covered leasehold improvements, retail improvements, and new restaurant construction). Congress’s intent was to allow the immediate expensing of QIP, or provide a 20-year recovery period in the case of taxpayers electing out of new limitations on the deductibility of business interest. The error means that the after-tax costs of modernizing and altering buildings of all types and uses have increased.

Bipartisan legislation introduced in both the House and Senate, the Restoring Investment in Improvements Act (H.R. 1869, S. 803), would correct the drafting mistake and ensure that the QIP of an electing real property trade or business is depreciated over 20 years, rather than 40 years.  Congress should move quickly to pass the measure.  

Other technical corrections supported by The Roundtable would ensure that residential rental property owned by an electing real property trade or business and placed in service before 2018 is subject to a 30-year recovery period.  The law is clear that the 30-year period applies to newly acquired residential rental property, and we believe Congress intended the same 30-year period (rather than 40 years) to apply to existing holdings.

The Roundtable will continue to advocate for legislation addressing the QIP error and other technical corrections, which will lead to relief for businesses all over the country.