The New Tax Law Change and Commercial Real Estate
By now, you should have had plenty of time to justify why your New Year’s resolution was way too ambitious and easily justify its early extinction, just like last year. So as we optimistically turn to 2018, let’s look at the tax changes and the possibility of positive impact on commercial real estate.
For the first time in decades, we have new tax law changes which, while still to be reviewed and evaluated, show positive impacts to the commercial real estate world.
First, “pass-through income” - prior to these changes, Qualified Business Income (QBI), such as income from partnership and LLC’s, would pass through to an individual and be taxed at their respective rate. Now, that pass-through income will be eligible for a deduction of 20% which in turn could lower their effective tax rate. There are earning limits that kick in at $157,500 for those filing individually/as a single and $315,000 if married, filing jointly. This may sound relatively simple up front, however, you should seek out a professional tax preparer to help you understand your specific situation under the new law.
Second, “1031 like-kind exchange” - this is part of the Internal Revenue Code that permits gains from the sale of certain income properties to be rolled over into like-kind real estate investments. This transaction defers one’s taxable event into a different designated, eligible real property. This provision was kept intact and is a financial decision that investors need to consider in their overall tax strategy. I believe in tax diversity as much as I believe in investment diversity.
Third, new expanded deductions and shorter depreciation schedules. The new law not only expands what improvements are eligible for a deduction, but it raises the current deduction limits from $500,000 to $1,000,000. Section 179 of the IRS code, is the section that addresses these expanded benefits, which are too numerous to review here but well worth a look at the IRS web site. Depreciation schedules have been reduced to 25 years from 27.5 and 39, respectively in certain situations. This change would allow accelerated tax benefits on capital and property acquisitions going forward.
If you are currently in commercial real estate, you will want to understand these changes to the tax law. Even as a tenant or lessee, you could garner positive impacts from these changes.
Will all of this mean that if you are not currently involved with commercial real estate, you should take all of your mutual fund money and start investing commercially? No, absolutely not. However, if you own commercial real estate or have been researching to diversify your non-real estate investment portfolio, you will want to look into these new tax laws. If you own or are looking to own commercial real estate, here are three things you should strongly consider as you start asking individual questions.
- Do you have a knowledgeable accountant that is up to date on these new changes?
- Do you have a good real estate/estate planning attorney?
- Do you have a very good commercial real estate broker that can help you determine values on potential investments, whether you are looking to buy, sell, or lease?
This article is not intended to provide tax or legal advice and the author is not an attorney or tax preparer. Individuals should consult their own tax preparer and attorney for specific information. The author is a commercial real estate broker and would help you in your commercial real estate needs.