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How Hoteliers Can Take Advantage of 2018 Tax Reform

Originally seen HERE.

Not many people do things ahead of time. How many people or organizations beat deadlines by months or even years? Similarly, how many investors sell perfectly good assets to buy new ones that aren’t exceedingly superior? Again, not many.

Yet, in both cases, we find ourselves in the situation wherein savvy investors will populate these ranks of the few. Because of the 2018 Tax Reform Act, the following actions have likely become financially beneficial, particularly to small and mid-sized hoteliers:

1. Complete a 2021 property improvement plan (PIP) by 2019 to take advantage of 100 percent bonus depreciation;
2. Replace an HVAC system scheduled to last until 2022 in 2018 to cash in on Section 179 expansion; and
3. Sell a performing hotel whose assets are on long-term depreciation schedules, then 1031 into another hotel (with PIP) which can achieve all the pro-investment benefits of tax reform legislation.

For investors who are small business owners, property cash flows can be significantly impacted by up to $1.5 million in deductions. By contrast, institutional investors don’t quite care for the irregularity created by accelerated depreciation on somewhat unpredictable loss schedules.

“A lot of potential investors don’t look at [the accelerated depreciation deductions] as a giant benefit,” Scott DeMartino, a partner at the law firm Dentons, points out. “Section 179 is still limited to $1 million, which doesn’t move the needle that much for a lot of [larger] investors.”

Similarly, the effect of bonus depreciation, though unlimited statutorily, is restrained by investment limitations elsewhere in the tax code. That said, DeMartino confirms the notion that accelerated depreciation can significantly impact investments by small and mid-sized firms, “to the extent they can leverage their early investment and benefit from the losses so that frees up capital to invest further,” he explains.

100 Percent Bonus Depreciation

If you are a hotel owner who wants to spend any amount of money on an acquisition, renovation, or refurbishment in the next few years, you hit pay dirt! The 2018 Tax Bill initiates 100 percent bonus depreciation on acquisitions (new and used) and implementation of most new FF&E/CapEx projects through 2022. Furthermore, if you’re sitting on the fence about horse-trading long-term holds in your portfolio–add the new depreciation schedule to the ‘pros’ list. You can “sell out” of the extended depreciation schedule and “upgrade” to the new 100 percent schedule with your acquisition.

“Taking advantage now is about more than just the ‘what ifs’—it’s about the time-value of money (TVM),” says Kevin Cawley, a cost segregation specialist with CSSI. “These additional cash flows may be reduced, increased, or go away altogether, but you can’t argue that fully extracting and reinvesting now will create the greatest ROI.”