2018 has been a roller coaster thus far. One of the most prominent factors being the new tax reforms. What is it about? Who should pay attention? Who does it most involve? While we can answer all of those questions, we can answer two! Everyone should pay attention to it, and as for who it involves, we can tell you about how it affects those in the commercial real estate market!
Analysts have been abuzz about the potential tangible benefits to those with commercial property. There are many tax advisers still figuring out how this plan will affect their clients’ bottom lines, as there could be potential earnings sitting on the table that need to be claimed. So will this affect all commercial property owners? Let’s break into this tax reform news and see what’s in store!
Deductions for partnerships, LLCs, S Corporations, and other pass-throughs
Often, pass-through companies such as S Corps, LLCs and partnerships, house investors properties due to these pass-through’s not being required to pay corporate tax.
As of the start of 2018 investors and shareholders will enjoy a 20% tax deduction on those aforementioned pass-through’s, aside from S Corps. When this deduction is combined with the ability to carry over certain losses, there can be a significant trim to your tax bill.
The exceptions to this deduction include:
- Individual business owners who earn more than $157,500 in taxable income per year.
- Joint filers who earn more than $315,000
If you are close to being in one of these two excerpt categories, it would be wise to consult your tax advisor to see if there are other forms of deductions that may be available and enhance the gap between you and this line of exemption.
1031 exchange preservations
There was worry in the air when the final tax bill was being formed, about the removal of the 1031 exchange mechanics. Luckily however those are still in place, allowing real estate sellers to defer the imposition of capital gains taxes on the sale proceeds as long as they re-invest the proceeds in another property.
The 1031 exchange can help commercial or industrial real estate owners to leverage their assets while deferring capital gains taxes and possibly avoiding them entirely. By “trading up” to higher value real estate, while sheltering profits, you could potentially generate a larger revenue.
Expensing options getting an expansion
Section 179 of the Internal Revenue Code covers depreciation deductions for commercial real estate owners. This same section allows taxpayers to deduct the cost of certain property as expenses, rather than capitalizing the costs. Section 179 could potentially reduce a properties tax bill, for a property that has generated quit a lot of extra income.
Previously, the limit on section 179 was $500,000, however now that limit has been raised to $1,000,000. This change was in hopes of encouraging business owners to invest and expand, rather than hold and preserve.
Long-term real estate benefits
While there are a few effects of the tax reform bill that will be felt almost immediately, there are some effects that won’t be present until long term requirements are achieved. These long term effects will have a greater tangible benefit on real estate holdings than deductions and exchange provisions that are already in place.
An example would be the estimation of home owners in high tax cities, selling their high costing homes and moving into multi family housing units, such as duplexes, condos, and apartments. This will trigger a large boon for apartment owners and those who hold vacant residential or mixed use lots in high-traffic areas.
It is now recommended that those who are holding hard-to-fill commercial properties like shopping malls, to consider converting the facilities into residential housing, if the zoning restrictions allow. By providing a solution to the increased single-family housing costs, you can create a high demand arrangement and keep the price at a competitive rate.
Those in the industrial real estate could potentially find themselves in higher property value if an infrastructure bill is passed. Shipping companies that are involved in the making of highways, bridges, and other forms of American infrastructure could benefit from a steady stream of income. This extends to warehouses, factories and manufacturing plants, as well as storage facilities.
Who is not affected by the tax reform?
- Student housing: There may be a drop in student housing due to the talk of eliminating the student loan interest deduction and assess income taxes on graduate student waivers.
- Medical providers and retailers: There may be a slight decline in real estate value, due to the chipping away of the Affordable Care Act (ACA). However on the otherside of this, strip malls that have medical tenants could start to thrive more due to the desire of the populace wanting to cut back costs, and creating a “med-tail”. This involves increased foot traffic to lower costing facilities such as physical therapist, full-service pharmacies, chiropractors, and dialysis facilities.
The tax reform from a business standpoint is starting to be considered as a once-in-a-generation opportunity for real estate investors to grow their business while preserving their existing assets. The way to achieve the highest benefit from this tax reform bill is to focus on the long term and structure your holdings in a manner that will benefit from all possible tax deductions.
If your already taking advantage of the 1031 exchange and pass-through entities, it would still be a good idea to give your real estate holdings a holistic examination every year or two. This may help jettison assets that are under-performing or make the necessary changes to those assets to derive a greater value from them!
We hope this information will help you reach a path that is more rewarding and beneficial to you. As always give us a call and let’s talk through the best possible plans for you and your property! We will keep you ahead of the curve!