TCJA Update: 4 Changes to the Real Estate Industry
Much has been written about the real estate changes with the new tax law (TCJA), and how they benefits the real estate industry – but what does it mean exactly? More importantly, is it something that will impact you personally, and are there planning opportunities you need to consider?
The changes that have received most of the headlines focus on the property taxes and mortgage interest individuals pay on their homes. While few like the idea of limiting these deductions, most taxpayers have limited discretion on the ability to make these payments.
With that being the case, this practical analysis focuses on how the changes impact real estate investors and business owners. Specially diving into four areas where changes have been made and are most relevant to our clients:
1. Like-kind exchanges
While the TCJA generally eliminates like-kind exchanges, it preserves exchanges for real property. Taxpayers need to consider the implications of any personal property transferred with real property.
The TCJA provides a new deduction of 20-percent of business income. For this purpose, unless the income of the taxpayer does not exceed certain thresholds, income derived from rental income would qualify for this deduction.
Evaluating the entity used to make and hold real estate investments is something we are encouraging our clients to do. While minimizing tax liability should not be the sole consideration in the entity you use, the new tax law changes warrant evaluating how your current real estate investments are held. This includes business owners who own properties within their operating entities that are unrelated.
The TCJA generally provides for immediate expensing by changing the deduction for assets eligible for bonus depreciation so that 100 percent of the cost of those assets can be taken in the year of acquisition. Perhaps more important to note, used property is now eligible for more rapid depreciation that was previously only available for new assets.
The cap and phase-outs for additional expensing have also increased, specifically for certain improvements to real property: qualified leasehold improvements, qualified restaurant improvements and qualified retail improvements. Provisions in the bill also adjust the useful life of certain assets to allow for more accelerated depreciation, one example being on residential real property.
4. Interest Expense
The TCJA limits the deductibility of a taxpayer’s net interest expense to 30 percent of its taxable income, but a real property business may elect to be exempted from the limits. This change provides investors in the development, construction, acquisition, rental, management, leasing and brokerage of real estate an advantage over other industries adversely impacted by the new limitation.
If you have any questions about the real estate changes from the TCJA or would like to schedule some time to meet with us regarding the above, shoot us an email at firstname.lastname@example.org.