Commercial Real Estate: The Biggest Tax Act Winner

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Commercial Property Owners Can Earn More for Less

U.S. commercial real estate is a likely winner in the evolving Republican tax overhaul, which is poised to lower rates for property owners, spur new investment and increase demand for rental housing.

Owners and developers of commercial real estate stand to gain from a new tax break for “pass-through” entities, which don’t pay corporate tax but instead pass income through to their owners’ individual tax returns.

Tax cuts will fuel economic and job growth creating increased demand for commercial real estate. Here are highlights how the new Tax Act will impact commercial real estate investors:

New Tax Act creates a 20% tax deduction for LLC’s, Sub S corporations and partnerships (subject to income and ineligible service business limitations). 

Section 179 doubles immediate deductions from $500,000 to $1 Million for non-residential real estate assets placed in service. This includes roofs, heating, HVAC, fire protection, and security systems.

Improved 25 year depreciation schedules: (from 27.5 for residential) and (from 39 years non-residential real estate). 

Land improvements (parking lots, drainage and tangible, personal property) for real property businesses are expensed 100% the next 5 years.

Real property businesses can deduct net interest expense that don’t exceed 30% of EBITDA.

Taxpayers can defer real estate gains with 1031 like-kind exchanges. If you sell a property outright, capital gains rates remain in effect under the new law. Holding properties over one year qualifies for a lower tax rate as in previous years

 

Tax Act prohibits deducting losses from an active trade, business, wage or portfolio income.

State and local taxes paid by a real property business remain deductible.

Business meals deductions are limited to 50%.

20% historic preservation and rehabilitation tax credits preserved but must be claimed ratably over 5 years.

The 10% credit for rehabilitation of pre-1936 structures is repealed.

The low-income housing tax credit is retained.

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