On December 22, 2017, President Trump signed the new Tax Cuts and Jobs Bill into law. The bill will provide a multitude of benefits for commercial property owners and is being hailed as a victory by every corner of the commercial real estate industry, including the NAIOP and the Real Estate Roundtable.
Let’s take a quick look at some of the changes the bill will implement as well as the benefits and possible drawbacks the industry may face as a result.
Major Changes and Benefits Explained
One change to the industry that the new tax bill will usher in is that commercial property owners will see a reduced depreciation schedule for nonresidential properties down to 25 years from 39 years. Among other benefits, this will allow investors to see the results of tax benefits on property acquisitions more quickly.
Other changes (and mainstays) in the bill include:
- The preservation of the sale of properties through 1031 tax exchanges
- The broadening of favorable capital gains tax treatment for carried interest
- An exemption for real estate businesses on interest deductibility restrictions
- The immediate expensing of business assets and capital expenditures
In addition, one complex, last minute change that persuaded some senators to vote for the bill was regarding provisions for sole proprietorships, S-corporations, and other entities that pass their income through to their owners and who pay taxes at their individual income tax rates.
Specifically, the bill allows those making less than $157,000 for individuals and $315,000 for married couples to take a flat 20% deduction on certain business income before finding the ordinary income tax they would owe. For individuals and entities making above those stated amounts, but less than $207,500 for individuals or $415,000 for married couples, the deduction is gradually phased out. This change in particular broadens the pool of entities that will benefit from the 20% deduction.
Agreed upon benefits from experts in the CRE industry include:
- The impending growth of hotels
- A rise in job creation
- Reducing barriers to private capital formation and business investments
- The ability to modernize and otherwise improve upon existing properties
- The preservation of historic buildings and structures
Even though the overall reaction regarding the new tax bill was positive in the CRE industry, some experts worry about the potential $1.5 trillion deficit it could add over the long term. If the bill contributes to higher inflation and a rise in interest rates, borrowing could become more expensive for real estate investors.
It’s still too soon to tell how some of the rules in the bill will play out, as some provisions may require clarity. Not only that, but most also have a “sunset”–meaning, they would either expire in 10 years or need to be extended by Congress. Because some provisions have an end date, if a shift in power in Congress occurs in the next few years, they will likely not be points of contention.
For more information on how Murphy Commercial Real Estate can assist you and your business in any commercial real estate venture, please contact us today.