The Tax Cuts and Jobs Act (TCJA) of 2017 made some noteworthy changes to the definition of qualified real estate under Sec. 179.Before the TCJA, only leased properties, restaurant real estate, and retail real estate were eligible. However, any non-residential real estate now qualifies if the improvements are made inside the building, with certain exceptions. Elements such as roofs, air conditioning, etc., which were previously treated as components and not as improvements, are now eligible.
Certain components of the HVAC system are considered major components because they play a discrete and critical role in the overall system. To determine if an HVAC system is a qualified improvement property, it must meet certain criteria. If the old HVAC materials performed worse than the current industry-standard HVAC material for that location and type of building, this is generally not an improvement according to this test. Replacing the only cooler in the HVAC system with a new model of similar efficiency and capacity would be considered a restoration because the chiller performs a discrete and critical function and represents an important component within the HVAC system.
However, air conditioning units do not meet the criteria for QLHI treatment, since the installation of an outdoor air conditioning unit is not considered an improvement to the interior of the building. Building owners often invest considerable amounts to replace parts of various components of the HVAC system. The TCJA has made it possible for non-residential real estate to qualify for tax deductions if certain criteria are met. Major components of an HVAC system can be eligible for qualified improvement property status if they meet certain criteria. Air conditioning units do not qualify for QLHI treatment since they are not considered improvements to the interior of a building.
