The Tax Cuts and Jobs Act passed in December and several of these provisions will take effect in 2018. Many individuals have already benefited from the new tax law by seeing their recent paychecks increase. We believe this tax reform will have a similar positive impact on the real estate industry. Tax reform can be a very complicated—and tedious—topic so we’ve highlighted some of the implications for real estate owners, small business owners, and individuals. We’ll preface by saying this is our interpretation of the law, prior to the regulations being written and what we think Congress intended by the text of the law.
Initially, many of us in the real estate industry were very concerned about tax reform and the negative aspects that were being considered. The International Council of Shopping Centers (ICSC), responded by forming a committee consisting of executives and tax professionals across our industry to garner input to deploy lobbying efforts. Stirling Properties played a significant part in providing consistent feedback that guided ICSC’s lobbying efforts. Several executives in our company, including Marty Mayer, Townsend Underhill, Jimmy Maurin, Will Barrois, and me, were active in lobbying congress, and as noted below, these efforts were successful. Together, we were able to quickly respond to aspects of the tax proposal that were detrimental to the real estate industry and offer solutions that would benefit our real estate holdings and the business as a whole. We’ve compiled a brief overview of some of the changes.
Real Estate Business Owners and Investors
- Expanded Bonus Depreciation: Items that were previously required to be capitalized over 15 years (subject to 50% bonus depreciation) are now eligible for a 100% deduction in the year of completion.
- Examples of these items include parking lots, tenant improvements, landscaping work, pylon lighting, etc.
- This provision begins to phase out after 5 years.
- Business Income Deduction: 20% of the taxable income generated from a business could be eligible to be deducted from taxable income pending multiple limitations.
- For example, if your share of taxable income from a business you own is $100,000, the first $20,000 may be eligible for a deduction, thus lowering taxable income to $80,000.
- Business income from pass-through entities like partnerships and LLCs will still be taxed at the new lower individual rates.
- Historic Preservation and Rehabilitation Tax Credit: The 20% credit for renovating certified historic structures remains in place but must be taken over a 5-year period as opposed to being fully deductible in the year of completion under the existing law.
- C-Corporations Tax Rate: The corporate tax rate under the new law is 21% as compared to 35% under the existing law.
- Property Tax Deduction: Still in place for real property trade or businesses including rental properties.
- Interest Expense from Loans: Businesses will still be eligible to deduct the interest expense from the debt incurred if its gross receipts are less than $25 million.
- The vast majority of commercial real estate in the Gulf South region would continue to be eligible to deduct interest.
- 1031 Exchanges: Real estate will still qualify to receive 1031 treatment.
- Capital Gains Rates: Remained unchanged at 0%, 15%, and 20% depending on income levels.
- Carried Interest: The new law requires a 3-year holding period to qualify for capital gains treatment as opposed to a 1-year holding period under the current law. This was a “win” for real estate as the original proposal was for carried interest to be taxed at ordinary rates.
- Tax Rates: Almost every bracket has been widened and lowered with the top bracket being lowered from 39.6% to 37% thru 2025.
- Standard Deduction: Single filer’s standard deduction increased from $6,350 to $12,000. Married filer’s standard deduction increased from $12,700 to $24,000.
- Personal Exemptions: Taxpayers will no longer be eligible to deduct the $4,100 per dependent.
- Child Tax Credit: The child tax credit increased from $1,000 to $2,000.
- State and Local Taxes: Deduction under the new law is capped at $10,000.
- Estate Tax Exemption: Doubled to $11.2 million for single filers and $22.4 million for married couples.
At the end of the day, the real estate industry appears to have fared well in the Tax Cuts and Jobs Act. Some of these items are pending a technical corrections bill and additional clarification, but the expanded bonus depreciation and business income exclusion make being a real estate investor an enticing proposition. For investors looking to deploy capital in a tax advantageous investment, real estate is an appealing option that will rival alternative investments. We believe tax reform will provide a stimulus for real estate investment over the next five years.
We will follow up with more in-depth coverage of some of these items in the future, as well as how Stirling Properties is adapting to take advantage of this new opportunistic landscape.
The information contained herein is intended for information purposes only. Individuals should seek advice directly from a qualified professional before making any decisions or taking any action that might affect your personal finances or your business. Stirling Properties is not responsible for any investment or monetary decisions made based on the information provided above and is not a tax advisor. The information provided above was done so with the perceived intent of the legislation and not based on the actual regulations. The actual regulations could yield significantly different results.