The Tax Cuts and Jobs Act (TCJA) of 2017 brought about several changes to the cost recovery rules for leased properties. Building extensions, elevators and escalators, roofs, fire protection systems, alarm and security systems, and HVAC systems are no longer considered improvements to leased properties. However, any non-residential real estate qualifies if the improvements are made inside the building, with certain exceptions. The TCJA also broadened the definition of eligible qualified real estate under Sec.
Before the TCJA, only leased properties, restaurant real estate, and retail real estate were eligible. Elements such as roofs, air conditioning, etc., which were previously treated as components and not as improvements, are now eligible. The Cost of Capital Allowance (CCA) adds that while replacement HVAC units installed on the roof of the building and on the concrete slabs adjacent to the building are structural components of the building, these improvements are made to the outside of the building and not to the inside. In conclusion, it can be said that air conditioners can be classified as either a leasehold improvement or equipment depending on where they are installed.
If they are installed inside the building, they are considered a leasehold improvement. If they are installed outside the building, they are considered equipment.
