The new Tax Cuts and Jobs Act (TCJA) is complicated and in some ways still ambiguous. It’s no secret that Congress rushed through the bill before the end of 2017. As a result, there are many loopholes of which you may be able to take advantage. If you own or invest in real estate, either in your spare time or full time, understanding how this new law will affect your business interests is crucial. Below are highlights of some of the changes in the new TCJA.
- The $10,000 property tax limit is only on personal real estate. On income-producing properties, there is still no limit to the amount of property tax you can deduct.
- The above is true for mortgage interest as well. The deductibility of interest on real estate loans for income producing properties has remained unchanged.
This new deduction can reduce your taxable income from a business (other than a C-Corporation) by up to 20%. Of course, there are some caveats. If your taxable income on your personal tax return is over $315,000 (MFJ), the 199A deduction is limited to the greater of:
•50% of w-2 wages
•25% of the w‐2 wages paid by the entity + 2.5% of the unadjusted basis of qualified
*The limitations begin at $315K MFJ and are fully phased in at $415K MFJ
Owners of investment real estate with taxable income below $415K could see up to 20% of the annual earnings from investments deducted from their taxable income.
Owners of investment real estate with taxable income above $415K still get a benefit of the 199A deduction. However, since most real estate investors have little to no w-2 wages that they pay it is going to be harder to take the deduction. There is good news though! If you do not pay w-2 wages, you can still take a deduction of up to 2.5% of the original cost basis of your real estate assets. (Example: You have income of $200,000 from your real estate business, assets of $1mm in that business, and you pay $0 in w-2 wages. You can take a $25K deduction ($1mm x 2.5%). Your taxable income from your business is now $175K).
- Bonus depreciation
Bonus depreciation is now 100% rather than 50%, and it also includes used assets (previously was only new assets). Real property, such as a building, still does not qualify for bonus depreciation, but any personal property can be expensed 100% in the year it was placed in service. These new bonus depreciation rules provide more incentive to utilize cost segregation on your new properties to minimize your current tax owed. This 100% bonus depreciation is retroactive to 9/28/2017. 100% bonus depreciation gradually ends after 2023.
- 179 expensing
Non-residential real estate can now fully expense the following under Section 179:
•Heating & A/C
- Carried Interest rules
These changes could have a very adverse effect on real estate developers. Many developers have a “carried interest” provision in their partnership agreements. It is now more difficult to get preferential long-term capital gain treatment on that portion of your income. You now have to hold the underlying asset (the one that triggered the carried interest) for more than three years for the carried interest portion of the gain to be considered long-term capital gain and be taxed at a maximum rate of 20%. If you hold the asset for less than three years, that gain is deemed to be short-term capital gain and is taxed at your marginal tax rate.
All in all, the provisions in the TCJA are generally favorable to owners and investors in commercial real estate. In addition to beneficial provisions listed above, the new law left in place the 1031 (like-kind) exchange and provided for up to a 20% deduction for individuals for qualified business income from pass-through entities. Having a knowledgeable tax accountant that understands these new and complicated tax rules could save you big dollars in light of this new bill. Contact Goldin Peiser & Peiser to discuss how we can make these new tax laws work for you.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.