How Tax Code Changes for 2019 Impacting Real Estate Investors?

As the saying goes, death and taxes are the only two certain things in life. For real estate investors and owners, taxes are an unavoidable part of life. Not only that, but so are new tax code changes.

The Tax Cuts and Jobs Act

A commercial real estate investment broker is expected to stay on top of tax code changes for 2019 to best advise their clients. However, if you own a Houston commercial real estate investment, you should also stay current on tax laws and code changes. Not being aware of tax code changes could hurt you in the long run.

TCJA’s Impact on Commercial Real Estate

Following the federal tax cuts and reforms of late 2017 (The Tax Cuts and Jobs Act or TCJA), a few things changed for commercial real estate. Most of the law’s provisions went into effect January 1, 2018. Below a few of the Act’s tax code changes 2018 that directly impact commercial real investors and property owners.

AMT

The TCJA repeals the corporate AMT (alternative minimum tax).

Business Interest Expense Limitation

The TCJA allows disallowed business interest to be carried forward indefinitely. Business interest — “any interest paid or accrued on indebtedness “properly allocable to a trade or business” but does not include “investment interest” (as defined in Code Section 163(d)).”

Carried Interest

Investors must now hold assets for three years instead of one year to qualify for lower capital gains tax rate on carried interest.

Depreciation/ MACRS (The Modified Accelerated Cost Recovery System)

The current depreciation rules for real estate remain in place. At the same time, the new tax code sets longer depreciation schedules:

  • 40 years for nonresidential property
  • 30 years for residential rental property
  • 20 years for qualified interior improvements.  

Consequently, these longer schedules could potentially have a negative impact on ROI.

Lower Corporate Tax Rate

Although this change won’t impact most investors, lowered to a flat 21%, large corporate real estate companies (such as REITs) will benefit from lower taxes.

REITs

A Real Estate Investment Trust is “a company that owns, operates or finances income-producing real estate.” In order to qualify as a REIT, a company needs to meet certain guidelines. Generally, REITs often trade on major exchanges. In addition, they offer investors with a cash stake in real estate. The new tax laws are favorable towards REITs. Lower corporate taxes are one major benefit for these corporate taxpayers. Not only that, but in some cases, REITs also benefit from the pass-through deduction.

Opportunity Zones

Investors now have new tax incentives for investing in qualified Opportunity Zones. Intended to encourage investment in targeted low-income, economically distressed communities, this provision allows temporary deferral of capital gains income. View our special section on Opportunity Zones for Commercial Real Estate Investors in Texas.

Stay Up-to-date On Tax Code Changes

As a commercial real estate investor, it is important to stay up-to-date on new tax code changes. After all, no one wants to be penalized because of ignorance. Not only that, but no one wants to miss out on tax benefits either.

Further Reading

Proskauer — The Effects of the Tax Cuts and Jobs Act on Real Estate

CohnReznick — A Review of the Tax Cuts and Jobs Act — Commercial Real Estate

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