Posted on April 25, 2018 at 13:15 PM
Major tax reform was approved by Congress in the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. Many of our clients ask us about the implications of the new tax reform on the commercial real estate market. In general, the new Tax Reform Bill is very good news for property owners and developers.
We summarized some of the new tax reform implications on the commercial real estate industry:
Pass-through income: According to the new tax reform, owners of pass-through entities (Sole proprietorships, partnerships, LLCs and S corporations) may be eligible to claim a 20% deduction for business-related income. This deduction begins for 2018 and is scheduled to last through 2025. For example, if you have $100,000 in pass-through income, you could qualify to deduct $20,000.
Real estate investors, private equity funds, as well as individuals who receive income from REIT dividends, usually form their entities in a pass-through structure. Thus, many businesses from the real estate sector will benefit greatly under the provisions of the bill. However, it’s important to point out that the 20% eligibility applies to business owners with incomes higher than $157,500 (individual) or $315,000 (for married couples).
Corporate Rate: The corporate tax rate has been reduced from a top rate of 35% to a flat 21% rate. Although many real estate businesses are organized as pass-throughs, some of them are operating large companies, and these companies will benefit greatly from this provision.
Asset Depreciation: Currently, owners can deduct 50% of a qualified property’s cost in the first year, then continuing depreciation in the years following. According to the new tax reform, businesses will be able to immediately expense 100% of the purchase of an asset (bonus depreciation). Bonus depreciation continues to be available for qualifying property, which is generally property with a depreciable recovery period of 20 years or less. In addition, under the new law the eligible property is expanded to include used property, while in the past, bonus depreciation was only applied to brand new property. Moreover, under the old law, roofs, HVAC and alarm systems depreciated as if they were part of the building. Under the new tax plan, they remain as also deductible.
Section 179: Section 179 of the IRS tax code allows businesses to deduct up to $500,000 in property placed into full purchase price of qualifying equipment and/or software purchased or financed during the tax year. In the new tax bill, the 179 deduction has been increased from $500,000 to $1 million with the phase-out limitation increasing from $2 million to $2.5 million for tax years beginning after December 31, 2017.
1031 Exchanges: The tax reform bill preserves the 1031 tax-deferred exchange rules that allow investors to defer capital gains on the sale of a property by reinvesting proceeds into another qualifying “like-kind” property. The change is that tax deferred exchanges can no longer be used for personal property.
The information provided in the article provides a general understanding of the new tax reform. In order to understand the full implications and to make the right investment decisions it is important to have an open conversation with qualified tax professional and commercial real estate investment advisor. In addition, it is extremely important for investors to reevaluate their investment strategies, under this the new tax reform.
For More information about the new tax reform please click on the link below. This document contains a list of FAQ’s (Frequently Asked Questions), collected by Marcus & Millichap research division. Click Here
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