How tax reform will impact commercial real estate
The Tax Cuts and Jobs Act, which passed December 20 of 2017, means big changes to the tax code. Real Estate leans heavily on taxes to propel investments. Let’s take a look at how a few things from the tax reform will impact commercial real estate.
REIT REIT don’t tell
Many commercial real estate investors use REITs (Real Estate Income Trusts). REITs provide income to investors in the form of dividends from things like rent and mortgage interest (but not from capital gains when properties are sold). The tax reform offers a lower tax rate on the dividends they pay out. Bottom line, if you have been considering getting involved with REITs, now might be a good time to make the jump.
Speaking of Pass-Through Entities…
Other pass-through entities such as LLPs and private equity funds get to claim up to a 20% deduction for business-related income (pass-through businesses owned by individuals making less than $157,500 and joint filers making less than $315,000 qualify for the full 20% deduction).
What about the beloved 1031 Exchanges?
1031 Exchanges, which defer capital gains taxes when you reinvest the profit back into another qualifying “like-kind” property, made it through unscathed. Well, for the most part. One small change, for example, is that tax deferment only applies to the value of real property and not any personal property (like furniture inside a restaurant). But for most commercial real estate investors, the oh-so-important 1031 Exchange remains intact. So keep investing!
Low-income Tax Credits
The low-income tax laws remain largely the same. These programs offer important incentives for real estate developers to provide, for example, a portion of low-income units in any development. In Colorado, low-income tax credit programs are managed by the Colorado Housing and Finance Authority (CHFA). CHFA said in a statement, “we are very pleased to share that the bill retains both private activity tax-exempt bonds, including single-family (and MCCs) and multifamily Housing Bonds, and the Low Income Housing Tax Credit.”
This is good news for real estate investors and society alike.
Are there any tax reform downsides? Possibly…
Carried Interest
In real estate, developers/investors often receive an ongoing portion of profits from a property even after their investment has been paid back. Its like bonus money when the property is doing well. This tax incentive, which is designed to favor long-term capital gains, was on the chopping block. But it remained with one key change: to receive this bonus gain, the asset must have been held for three or more years. Previously, it was only one year.
Some think this could have adverse impact on investing, but investors with a long-term holding strategy are likely to be unaffected.
In the Residential Real Estate corner…
It’s worth mentioning that mortgage interest deductions on primary and secondary homes was capped at $750,000 of the value of the mortgages (previously $1,000,000) and State and Local (SALT) deductions were capped at $10,000 (previously there was no cap). In Boulder, where the median single-family home is valued at more than $885,000 this could impact many residents.
Overall, the bill is structured to incentivize investment in building, jobs, and manufacturing, which is likely to drive demand for office, retail, and industrial spaces. When the economy wins, commercial real estate wins. Things are looking bright for commercial real estate investors in 2018.
