The new Tax Cuts & Jobs Act was signed by President Trump on December 22, 2017 and ushers in one of biggest tax reforms the country has ever seen. The law is expected to be extremely beneficial to the public by offering significant tax breaks across the board, which will result in more savings and additional investment by both companies and individuals in the US.
The Real-Estate industry is especially poised to benefit from the tax bill, as economic growth will fuel the demand for commercial real estate across the country. In addition, there are a number of provisions in the new law that will benefit the real-estate sector specifically. These provisions include:
A deduction of up to 20% for individuals and trusts that report qualified business income earned through Pass Through entities. Pass Through entities are companies (partnerships and LLCs) that do not pay direct corporate tax, and rather “pass through” their gains and losses to the individual members of the company or partnership. As most real-estate investments are structured as pass through entities, there should be significant benefit for real estate investors.
An allowance for immediate expensing of qualified personal property. This now includes any investments in roofs, Heating, Ventilation & Air Conditioning (HVAC) Systems, fire protection, alarm systems, and security systems among other qualified property expenses. This can be extremely beneficial to real-estate professionals as they can now invest in critical infrastructure for their properties and take a 100% expense in the first year.
There were a number of provisions that either did not get passed in the final bill, or elected to maintain favourable tax treatment for the real-estate sector including:
Existing 1031 Tax Breaks Still In Effect. The new bill maintains some of the existing tax breaks that positively affect real-estate investors, including the 1031 tax-deferred rules. This rule allows investors to defer capital gains on the sale of a property by reinvesting the proceeds into another similar asset. While the new tax law excluded personal property from this provision, it does maintain real-estate thereby allowing real-estate owners and investors to defer taxes by reinvesting their proceeds from a sale.
No changes to depreciation lives. The senate had proposed to change the depreciation periods of non-residential and residential real-estate from 39 years and 27.5 years respectively down to 25 years. While this provision was not included in the final bill that was passed by President Trump, real-estate owners and investors can still benefit from the standard depreciation write-offs which can be extremely beneficial in minimizing taxable income on a property.
Change to the Carried Interest Holding Period. The new law also changed the carried interest provision holding period from one year to three years. Carried interest allows sponsors and investment managers to take their share of profits at the lower capital gains rate rather than personal income rates. While the change in holding period may affect other industries such as private equity (where there might be a shorter investment hold period), the real-estate sector is typically a longer-term investment and as such will not be adversely affected by this change.
The Tax Cuts & Jobs Act is expected to reduce taxes for individuals and corporations, thereby creating new jobs and accelerating the economy. The bill includes new provisions and maintains existing laws that benefit the real-estate industry. The change will enable additional savings and investment in the US, and will facilitate a stronger real-estate market overall.
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