Tax Cuts and Jobs Act
It appears very likely that there will be a new tax bill passed by Congress this year. While the stated goal was to simplify the loophole infested tax code, the actual bill can be best described as a major re-write with many of the loopholes just shifted around. The affect on individual taxpayers is still an open question, but the (generally) positive investor sentiment is directly a result of the tax bill’s corporate rate cut.
The Commercial Real Estate industry did much better on most tax issues than analysts has originally thought, because many lawmakers had initially talked about scrapping the 1031 exchange and carried interest, completely eliminating the state and local tax deduction, and eliminating the business debt corporate deduction. However, those provisions affecting commercial real estate did not make if out of committee.
The House bill would cap the top tax rate for pass-through businesses at 25%, down from the current 39.6%. The Senate legislation would allow most pass-throughs to deduct about 23% of their business income from their taxes, subject to various limitations, effectively reducing the tax rate for the highest earners by 10%.
Also, like-kind exchanges for real estate transactions (1031 exchanges) are preserved, and the deduction of carried interest is almost entirely unchanged.
The final bill appear to retain or increase important incentives in the tax code for commercial property ownership and business investment.
There will be some challenges, namely on what qualifies for the pass-through deduction. The Treasury and the IRS (and probably cause some court cases) will be need to finalize the details and real estate investors are going to want to see how the new pass-through rules work out before they can know 100% how it will affect their business.
We are excited about the new tax bill and how it affects Commercial Real Estate, but tax policy swings back and forth. Changes to the tax code are often ephemeral and we will continue to lobby for our customers.
