There is a lot of smoke and mirrors being employed by both sides of the aisle when it comes to the recently passed tax plan. Some would have you believe it is the end of the middle class, while others all but guarantee a golden age for those who would climb higher. But how will it affect the commercial real estate market? Ultimately we will have to wait and see, but the plan as it is designed to work looks good for investors and appears to avoid a cataclysmic event that some have predicted.
While there are still a lot of questions about the overall benefits, the investment and commercial property sectors have reason to rejoice, to the point that they are consistently being called the “big winners” in this tax reform.
First of all, of course, is the corporate tax rate cut from 35% to 21%. This is an instant savings for all incorporated investment property owners and retailers alike, allowing them to further invest or provide larger bonuses. The examples to date include; Apple, Home Depot, Starbucks, and Walmart to name a few.
The new law limits interest expense deductions to 30% of adjusted taxable income, but most operations that would incur interest for investment property owners are exempt from this rule.
While home equity debt is no longer deductible for most people, there is a clause that allows the proceeds of such a deduction to be used for the acquisition of new properties or improvement of an existing rental property. Excess capital gains can be deferred by similar means.
Investment property owners can also fully expense some investments, rather than having them spread out over years – a process that will allow investors to consider further expansion.
There is also a “freebie” deduction of 20% of qualified business income for pass-through entities, and those making an income of less than $157,000 if filing single or $315,000 if filing jointly will be automatically qualified for this deduction without the requirement of a wage and basis calculation.
There is one missed opportunity that would have been an additional benefit for investment property owners. At one point, there had been a proposal to change the “useful life” of commercial property to 25 years from the current 39 years. This would have increased the annual amount for this deduction. Unfortunately, we will not be seeing this, as it did not make the final bill.
One thing that is not changing, that will be of benefit to investors, is the IRS Section 1031 exchanges. Investors can still immediately reinvest gains in property sales to similar properties in order to defer that gain. Many had feared that 1031’s may have been greatly impacted or revised but fortunately that was not the case.
Finally, because this is a huge tax bill and it was pushed through relatively quickly, it is almost certain that there will be loopholes to be taken advantage of. Hopefully, we can all find them soon!
