At NAC, we’re architectural consultants, not tax experts, but much of what we do involves due diligence for commercial real estate investments. There’s been a lot of talk amongst our customers and colleagues about the new tax bill that took effect in 2018 and how that might affect their commercial real estate holdings. So we thought we’d do some research ourselves, and share with you the issues in the new tax bill that might affect you most.

Commercial Property Owners will benefit from the new tax bill.

While not every real estate holding will be affected by this sweeping tax reform, most analysts agree that the majority of commercial property owners stand to benefit substantially.  If you own commercial property in the United States, you owe it to yourself to learn at least the basics of this recent tax reform; read on to get started understanding how it might affect you and your commercial holdings.

Deductions for Pass-Throughs

A good deal of real estate investors hold their properties in partnerships, LLCs, S Corps, and other pass-through corporate structures.  These companies pass gains and losses on to individual shareholders or partners, who then pay taxes on any money they have made through the pass-through company.  Thanks to recent tax reforms, shareholders and investors will now be able to use a 20% tax deduction on their partnership income.

It’s important to note, however, that individual business owners with a gross income of more than $157,500 per year may be ineligible for this tax deduction.  Joint filers who earn $315,000 per year in taxable income may also be unable to claim this deduction. The solution is simple, though: meet with your tax advisor now to find other deductions that will place you into the right income category to take advantage of this tax break.

Preservation of 1031 Exchanges

The 1031 exchange provision allows those engaged in the sale of real estate to re-invest their capital gains from sales in other properties without paying tax on them.  This provision has been retained in the new 2018 tax laws, allowing commercial and industrial real estate owners to leverage their assets more effectively by deferring capital gains taxes.

Expanding Expensing Options

Before the implementation of this year’s new tax laws, the limit on Section 179, which covers deprecation deductions, was capped at $500,000; this year, the threshold has been doubled to $1,000,000.  This section of the Internal Revenue Code was designed to allow taxpayers to deduct the costs of certain commercial properties as expenses on their taxes instead of capitalizing them. If your commercial property has generated a good deal of extra income, the ability to deduct expenses under this section may allow you to invest and expand your holdings while simultaneously taking advantage of significant reductions in property tax.

Low-Income Housing Tax Credits

If you’re involved in commercial real estate, you’re probably aware of the existing shortage in low-income housing. The program currently provides states and local LIHTC-allocating agencies with nearly $8 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation or new construction of rental housing targeted to lower-income households. However, because the tax bill that was passed last year amounted to a big cut in the corporate tax code, the existing LIHTC program stood to see the value of its tax credits greatly reduced in 2018 and beyond. With corporations now paying lower tax rates, the credits aren’t as valuable as they once were. Without intervention, this could have compounded the existing LIH shortage drastically.

To combat this, Congress approved a significant increase in the Low Income Housing Tax Credit program in passing a trillion-dollar budget bill in mid March 2018 – the first increase to the LIHTC in over a decade.

This latest adopted provision will increase the allocation of LIHTCs by 12.5% over the next four years, at a cost of nearly $3 billion. This will help offset the hit the tax credit program took as part of the tax deal that President Trump signed Dec. 22. For a corporate investor, that represents a 15% cut in the tax savings they receive from investing in low-income housing tax credits, which means a significant win for affordable housing production and preservation.

Historic Rehabilitation and Preservation Tax Credit

The rehabilitation credit applies to costs you incur for rehabilitation and reconstruction of certain historic buildings. “Rehabilitation” includes renovation, restoration, and reconstruction. Beware, however, as it does not include enlargement or new construction.

Generally, the percentage of costs you can take as a credit is:

• 10% for buildings placed in service before 1936
• 20% for certified historic structures

The final bill keeps the credit, but instead of allowing developers to take the full 20 percent benefit when a restored building opens, the credit will now be parceled out over five years.  That means the credit could be less attractive to impatient investors who don’t want to wait to cut their corporate tax liability.

What Sectors Will Not Benefit?

While most commercial real estate investors stand to benefit materially thanks to these new tax laws, not all sectors are likely to reap equal benefits.  Those who own properties that are directly targeted toward healthcare facilities and college student housing do not stand to benefit from 2018’s sweeping tax reform, so if you are currently investing in these forms of commercial property, you may want to reconsider your holdings.  Additional changes that did not make it into the final tax law that proposed to eliminate student loan interest deductions stand to negatively impact college enrollment rates, while the expectation that government officials will continue to take apart the Affordable Care Act has already been negatively impacting hospital and health-care facility real estate values.

Commercial Real Estate Due Diligence

As we mentioned, we’re no tax experts. As architectural consultants, however, we do love buildings.  We specialize in property condition assessments, energy analysis, and real estate due diligence. Let us help make sense of your commercial facilities and properties, so you can make sense of your investment.

Have Questions? Connect with us!