Education: Tax Law Changes for Real Estate Investors
Impact of Tax Law Changes on Real Estate Investments
The Tax Cuts and Jobs Act of 2017 has tax professionals working overtime in order to understand all the changes for this tax year. Not only does the new tax law impact working individuals and corporations, it also changes that effect real estate investments.
Changes to Bonus Depreciation
Previously, bonus depreciation for property placed in service was as follows:
50% for 2017
40% for 2018
30% for 2019
Additionally, the qualified property had to be new, not used.
However, under the new law, the bonus depreciation schedule for a property placed is:
100% for property placed in service after Sept. 27, 2017 and before 2023
80% for 2023
60% for 2024
40% for 2025
20% for 2026
Now, a qualified property includes property that was acquired but the taxpayer had not previously used the property, so the property does not have to be new, it just cannot be acquired from a related party.
Section 179 Expensing
Section 179 expensing has also increased to include roofs, HVAC systems, fire protection, alarm systems and security systems, with the allowable expense increased from $500,000 to $1,000,000 in 2018, and the phase-out deduction increased to $2.5 million. These rules now include tangible personal property acquired for rental properties, furniture and appliances.
Potential Losses of Prior Credits
Interest deduction limitation
Interest is now limited to 30% of a business’ adjusted taxable income, with the exception of businesses with average annual gross receipts of less than $25 million. Real property businesses can opt out of the interest limitation if they elect the Alternative Depreciation System (ADS) recovery period rather than the Modified Accelerated Cost Recovery System (MACRS). ADS recovery periods are:
40 years for nonresidential property
30 years for residential property
20 years for improvement property
State and local tax and property tax deduction
The exclusion of local income and sales tax deductions is for non-corporate taxpayers. There is also a $10,000 limit for deductibility of property tax which applies to individuals not businesses.
Net operation loss limitation
Under prior law you could deduct up to $500,000. The limit would be reduced dollar-for-dollar if $2 million in property was placed in service during the year. Under the new law, you can deduct up to $1 million starting in 2018. The limit is reduced dollar-for-dollar if $2.5 million worth of property is placed in service during year. The new law also adds tangible property used for lodging (beds and other furniture for hotels and apartments) and an election for roofs, HVAC property, fire protection and alarm systems, and security systems for nonresidential real property placed in service after the date the real estate was first placed in service. The provisions are effective for property placed in service in 2018.
The new tax law changes will provide significant tax savings for the majority of businesses given an overall reduction of tax rates, and increased bonus and Section 179 deductions. Real estate owners should seriously consider projected revenue, tax liability, and the application of accelerated depreciation to take advantage of these increased expenses on all acquisitions. As always, you should consult your tax profession before making any decisions.
LINK Portfolio Alternatives not, by means of this publication, rendering legal, tax, accounting, consulting, securities, real estate or other professional advice or services, and this publication should not be used as a basis for any investment decision or as a substitute for consultation with professional advisers.