CCIM wants Congress to Change rules for leasehold improvements and 39yr deprecation.
The Economic Recovery Tax Act of 1981 put in place a 15-year depreciable life for all real property that was placed into service on or after the 31st of December 1980. Any property that was placed into serviced after March 15, 1984 was extended to 18 years, three years more than the original recovery period that the Economic Recovery Tax Act of 1981 had put into place. Also, for any property that had been placed into service after May 8, 1985 the depreciable life was 19 years.
In 1986, there was a new tax reform act put into place changed the depreciation rules yet again, changing it to 31 ½ years for commercial property and 27 ½ years for residential property. Of course this was not destined to be in place for long at all; in 1993 the rules were changed yet again and the depreciable life for commercial property was changed to 39 years, and the depreciable life of residential property remained the same.
Why the changes in depreciable life? These new laws were put into place to make up for the passive loss tax laws and other changes in the tax laws, however the Federal Government did a study whose findings have shown that the 39-year depreciation life set in place is too long, much longer than any economic depreciation period. There have been numerous other studies that have come to the same conclusion but none of these studies have gone so far as to make an actual recommendation as to what the best depreciation period should be. There are advantages to having a shorter depreciation period but there are also advantages to having a longer depreciation period in place, including the fact that it is easier for people to be able to invest into the market. Whether or not this advantage outweighs the advantages of having a shorter depreciation period in place remains yet to be seen.
Many groups and legislators are pushing for a 'more realistic' cost recovery period, usually about ten to fifteen years. This gives owners a reason and excuse to make improvements to their property. The 39-year recovery period that is in place currently is said to be much too long, not giving owners enough incentives to make improvements as leases will never last that long nor will any improvements made to the property during that time. Most improvements of this nature, such as new wiring, cable readiness, kitchen styles, rest room styles, and other various technologies are usually put into place to suit a particular tenant or a particular style of tenant and so it is very unlikely that they will all be in place for the next 39 years; most leases last no more than 15 to 20 years and it is likely that leasehold improvements might have to be implemented for new tenants anyway.
The point of view of the CCIM is that there should be new tactics in place to measure the most appropriate depreciable life for such properties. They feel that a depreciation period should more realistically reflect the lifetime of tenant or owner implemented improvements and 39 years is an unrealistic perception of the useful lifetime of a given building and any improvements made to a building.
CCIM is in favor of legislation that allows the rest of any tenant improvement costs to be written off once a lease has expired, and not over whatever the depreciable life has been determined to be. In addition, they are in favor of legislation that reduces the tax in this instance to 15%, the same rate as the capital gains tax. As of right now, most lawmakers are in agreement that the mandated depreciable life is a bit too long, but any provisions and amendments are bound to be costly to the federal government. Also, when it comes to other tax cuts and legislation, this is not a tax issue that comes to the forefront of Congress' attention.
So far, there has been no current legislation introduced that deals with leasehold improvements. Congress has actually begun to consider tax proposals and they are still being urged to take a long and hard look at the 39-year depreciable life period.
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