As the United States begins to emerge from the coronavirus pandemic, new uncertainties have emerged in the market. Pent-up demand for consumer goods and services has led to an increase in inflation. Over the past 12 months, the consumer price index has risen 5.4%, which is the largest 12-month increase since 2008. This trend has significant effects on the real estate industry.
During the coronavirus pandemic, lumber and steel mills had a slowdown of production due to stay-at-home orders and a decision to cut back on production in anticipation of a slowdown in demand due to the COVID-19 recession. As coronavirus vaccinations rolled out in the United States and the pandemic restrictions began to ease up, this slowdown in the production of building materials such as lumber and steel led to a mismatch between the supply and demand, which then led to the spike in prices we experienced earlier in the year.
As lumber and steel are the primary components of real estate construction, this negatively affected new housing prices for prospective homebuyers. The increase in demand for newly constructed residential and commercial real estate eventually spilled over into the price of existing properties, leading to an increase in prices for the real estate market overall.
Now that housing and construction prices are starting to stabilize (in part due to the course correction happening in the price of building materials), it would be good to remind readers that there are existing real estate-related provisions in the tax code that can help taxpayers save on their tax bills.
Typically, a newly constructed or purchased building placed in service is eligible for depreciation expense over 27.5 or 39 years, depending on residential versus commercial use, respectively. However, a cost segregation study can help property owners save money on their taxes by allowing them to separate specific classes of assets into personal property or shorter-lived improvements. This methodology allows the segregated assets to be depreciated over a shorter life, which speeds up the timing of this tax deduction. With allowable 100% bonus depreciation for 2021, eligible assets can see a complete write-off if placed into service before the end of the year.
Withum is able to provide this service to our clients, in addition to other real estate-focused advisory, audit, and tax services.
Author: Harrison Lindsay, CPA, Real Estate Services Team Member | [email protected]
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