Bipartisan Senate Bill Would Confirm 15-Year Depreciation Recovery Period Applies to Tenant Improvements

A bipartisan group of Senators, including Senators Rob Portman (R-OH), John Thune (R-SD), Pat Roberts (R-KS), Pat Toomey (R-PA), Doug Jones (D-AL), Angus King (I-ME), Joe Manchin (D-WV), Jeanne Shaheen (D-NH), Kyrsten Sinema (D-AZ), and Martha McSally (R-AZ), introduced the “Restoring Investments in Improvements Act” on March 14. This bill would resolve an inadvertent error in the 2017 tax reform bill (known as the Tax Cuts and Jobs Act, or TCJA) relating to the depreciation of tenant improvements.

Prior to enactment of the TCJA, tenant improvements were depreciated over a 15-year recovery period and were assigned a 40-year recovery period under the so-called “alternative depreciation system” (ADS) for REIT earnings and profits purposes. The 15-year recovery period had originally been enacted and eventually made permanent with bipartisan support. The TCJA was described as combining this 15-year write-off for tenant improvements with similar provisions for retail and restaurant depreciation into one provision called “qualified improvement property” (QIP) that would be subject to a shorter, 15-year depreciation term. Taxpayers could elect to write off QIP expenses under the 100 percent bonus depreciation rules. Further, a 20-year recovery period would apply under ADS (also applicable for taxpayers who elect out of TCJA’s interest deduction limitation as a real property trade or business).

Inadvertently, the final TCJA bill excluded both the 15-year life for taxable income purposes and the 20-year ADS life for QIP expenses. This new legislation would restore both the 15-year recovery period for taxable income purposes as well as the intended 20-year period for ADS purposes. The Joint Committee on Taxation has estimated that this change would be revenue neutral.

(Contact Dara Bernstein: dbernstein@nareit.com)

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