Leasing To A Non-Profit Makes The Property Tax-Exempt Use
Under Sec. 168(h), which falls under 168(g)(1)(B), the regulations dictate that when a property is leased to a non-profit, the property becomes tax-exempt use. This means if you complete a Cost Segregation Study there will be no bonus depreciation on the reclassed personal property and the resulting tax lives of the personal property will be lengthened to follow the ADS (Alternative Depreciation System) tax lives.
When leasing property to a non-profit, you must use the ADS (Alternative Depreciation System) for personal property and land improvements. It is possible that you may also need to use ADS depreciation for the non-residential real estate if more than 35% of the property is leased to a tax-exempt entity and there is a disqualified lease. A disqualifying lease can occur when the lease term exceeds 20 years, including options to renew, or that doesn’t renew at a fair market rate on the renewal date.
Additionally, you must follow Sec. 168(g)(3)(A) which requires any tax-exempt use property subject to a lease to use a recovery period that is no less than 125% of the lease term. Again, this includes any options to renew. For example, if the lease term is 10 years, you must take straight-line depreciation over a 12.5-year recovery period for all personal property (5-, 7-, & 15-year assets). Following this rule is what usually determines whether a cost segregation study will make sense for a particular property.
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