Congress enacted the Tax Cuts and Jobs Act in December to provide the most substantial overhaul of the United States tax code in decades. There has been plenty of publicity surrounding the personal income tax effects stemming from the enactment of this act, however, there are a number of other areas of the tax code which are significantly affected. There are a number of provisions in the act that will directly affect the real estate industry:
Bonus depreciation. The act will now allow certain taxpayers to elect to treat qualifying property as a deductible expense rather than as a capital expenditure. This will allow many business to immediately expense large expenditures made in connection with certain real estate purchases. This particular provision will be phased out as by 2023.Real property asset lives. The act now is intended to provide that qualified improvements to real estate will have a useful life of 15 years. A technical correction to the law will be necessary in order for this piece of the law to actually come into effect.Like-kind exchanges. Generally, tax-free like-kind exchanges have been eliminated. However, the like-kind exchange of real estate has been preserved. The impact of this is that upon each purchase of real estate the buyer will need to consider what the tax effect is for the tangible personal property associated with the purchase.
Business income deduction. There is a new deduction for business in the amount of 20% of qualifying business income, however this deduction is limited to 50% of the W-2 wages paid by the business or the sum of 25% of the wages paid plus 2.5% of the unadjusted basis of certain property the business uses to product qualified business income.
Changes for a tax-exempt investors. The unrelated business taxable income rules have been modified significantly in that you can no longer offset the income from one unrelated trade or business with the loss from another. It is possible that the IRS will treat each real estate asset as a separate business, thus losses from one property may not be able to be used to offset income on another property. This can effect nonprofits across the board.
Net operating losses. They can no longer be carried back but may only be carried forward indefinitely, and a net operating loss arising in a tax year may only reduce 80% of taxable income in a carryforward year. This provision will affect many business who have experienced gains in prior years and losses currently. These taxpayers will no long be able to apply some of the losses to previous tax years.Personal real estate. There are two major provisions that are not necessarily specific real estate business but will affect significantly individuals who own a home. The first is the home mortgage interest deduction which is now limited to interest on $750,000. The second is that state tax deductions will be limited to $10,000. While the increased standard deduction has been increased, many individuals paying more than $10,000 in real estate property taxes will no longer get a deduction for payment of such amounts.
Tim Malloy is an attorney in Barley Snyder’s Tax Practice Group.