On December 22, 2017, President Donald Trump signed into legislation the Tax Cuts and Jobs Act. Of importance, the bill repealed and/or limited many deductions for individuals, such as implementing a $10,000 cap on deductions for state and local taxes, which includes property tax. This cap, however, does not apply to state and local taxes paid while carrying on a real estate trade or business. The change has led to a spell of homeowners hurrying to prepay their property taxes in order to take the deduction when filing their taxes in April of 2018. Outside of the many changes which will affect individuals at a personal level, there are also many changes, as well as preservations, which will affect the commercial real estate industry.
An important provision which the new legislation kept in place was preserving Like-Kind Exchanges (Section 1031) for real estate. Earlier versions of the tax bill would have repealed this tax deferral structure, which would have had adverse effects on the commercial real estate industry. Through this preservation, however, investors and those engaged in the commercial real estate industry will continue to have a year to re-invest their gains from a sale of commercial real estate property into different commercial real estate property without having to pay taxes.
Additionally, New Market Tax Credits (“NMTC”) were protected in the Tax Cuts and Jobs Act. Similar to Like-Kind Exchanges, earlier versions of the legislation had repealed the provisions which related to NMTC. Had the NMTC been repealed, many locations and areas across the country would have had little to no chance of development due to the lack of this tax incentive. Through the preservation, however, these areas which investors were previously bearish of will continue to have a chance of development through the utilization of these tax credits.
Furthermore, the estate tax thresholds were doubled, from $10.98 million for a married couple to $21.96 million. Due to the amount of real estate which is often passed down generationally, this change will help protect heirs who face larger tax bills. In the past where many estates were forced to sell real estate to pay burdensome tax bills, this may no longer be the case. These assets, which in the past would not have been protected, will now be able to be preserved for generations to come.
Finally, while most coverage of the tax bill revolved around the reduction of the corporate tax rate from 35% to 21%, many real estate businesses will see additional tax incentives through a reduction of pass-through business income. Businesses organized with under a “pass-through” regime, such as limited liability companies and partnerships, will be eligible for a 20% deduction in business income. This 20% deduction of business income, however, is limited to either the greater of: (1) 50% of W-2 wages paid; or (2) the sum of 25% of W-2 wages paid plus 2.5% of the value of capital assets. These limitations only apply to businesses whose owners have income in excess of $157,500 for single filers, or $315,000 for joint filers. Therefore, business income derived from a real estate business in a pass-through entity may be eligible for an income tax deduction.
If you have any questions regarding how the new tax bill with affect you or how to navigate all the recent changes, please do not hesitate to contact either a real estate or tax attorney. Additionally, all property owners should remember that March 31st is the deadline for filing a Complaint Against the Valuation of Property. With the implementation of the $10,000 cap for the individual deduction of state and local taxes, if successful, this may be an alternative method for decreasing tax liability.