The Potential Impact of the Tax Bill on Commercial Real Estate

As we wait for the House and Senate to reconcile their two versions of the tax bill for the final outcome, the commercial real estate industry has a better idea of the new code’s potential impact. Overall, the tax bill news is positive for the commercial real estate world.

NAIOP president Thomas Bisacquino told the NY Times the real estate industry was left whole and with working provisions still in place. In a later article, New York University Law School taxation professor Daniel N. Shaviro agreed. “Real estate does great. It’s hard to imagine what they might have asked for that they don’t have.”

Here are the potential impacts on the commercial real estate industry:

  • The current House version of the tax cut bill slashes the corporate tax rate immediately to 20 percent from 35 percent, while the Senate version waits until 2019.
  • The House bill proposes to cap the amount of interest expense on commercial loans that companies can deduct, but the cap will not apply to commercial real estate.
  • Commercial real estate like-kind exchanges, such as 1031 exchanges, remain in place.
  • The House and Senate bills have a lot of work to do to reconcile their two proposals “pass-through entities” like S-corps and partnerships. Two important notes here:
    • According to Tony Nitti, Forbes Contributor, rental property owners should track how this is handled. The House version tops all business income, like pass-through income, rate at 25 percent, while the Senate allows for a 23 percent income deduction up to a limit equal to 50 percent of the W-2 wages paid out by the business.
    • Since many REITs are structured as pass-through entities, REIT investors stand to win. The House version caps pass-through income to 25 percent while the Senate drop the rate to 29.6 percent.
  • In the Senate version, a “taxpayer option” shortens the depreciable life of commercial assets to 25 years. Property owners can speed up the rate at which they take deductions. “The property owner has a non-cash deduction, and essentially shelters more income,” said Shimon Shkury, founder of Ariel Property Advisors, to the Real Deal. The House version has an exemption with the current depreciation rules continuing for commercial structures.

The final product is sure to change between now and whenever the bill reaches President Trump, but the early look is positive for commercial real estate. For investors and developers, new pass-through rules and final corporate tax rate will have the most significant impact from tax policy changes.

By |2018-06-19T14:17:46+00:00December 5th, 2017|
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