The hidden savings for real estate developers and owners in the "Economic Stimulus Act of 2008"

While the media has focused on the tax rebates that individuals will receive, buried within the "Economic Stimulus Act" that president Bush recently signed into law is a big benefit for real estate developers and owners. In a nutshell, tenant lease improvements that you construct or share in the cost of during 2008 qualify for an additional depreciation deduction of 50% of the costs incurred (ie, bonus depreciation). For example, you the real estate owner spends $100,000 building out a tenant space during 2008. Normally, most of these costs would have to be depreciated over 39 years for income tax purposes. Under the newly signed act, you can now take an additional depreciation deduction in 2008 of $50,000, and write off the remainder over 39 years. By taking this additional deduction, you will save close to $20,000 in 2008 income taxes over the previous tax rules (savings assume a 40% tax federal and state tax bracket). What type of tenant lease improvements qualify for bonus depreciation? * Improvements made under a lease agreement. The improvements can be made by either the the landlord or the tenant. * The improvements must be made to the interior of the current space (common areas, expanding the building, improving the internal structural framework, etc. do not qualify). * Your building must be at least three years old (in actual age, not how long you have owned the building). * The construction of these improvements has to begin after 12/31/07 and in most circumstances be completed before 1/1/09. * The improvements cannot be for a related party. Anything else in the economic stimulus act for developers and owners? * Section 179 expensing amount has been increased to $250,000. However, in the IRS view, real estate owners are not in a trade or business, so you will probably not benefit from this increase (unless you are buying equipment to use in your development business, like a backhoe). * Besides the above improvements, other property that qualifies for the 50% bonus depreciation is five and seven-year personal property (such as carpeting and wallpaper) and 15-year property (such as land improvements) included in the construction of a building. But be careful of the tight timeline constraint discussed above - you cannot have started digging until after 12/31/07, and you have to complete your building before 1/1/09. What happened to the 15-year depreciation rule for qualified lease improvements? That rule was extended this past December for improvements completed by December 31, 2007. For 2008, we are back to using 39 year as the depreciation life. (but with 50% bonus depreciation). Please remember that the above information is general in nature. You should discuss your particular situation with an income tax expert. Roger Upton, CPA, is director of MS Consultants, LLC, Williamsville, N.Y.