On December 22, 2017, President Trump signed the $1.5 trillion tax bill; HR 1 – Tax Cuts and Jobs Act (TCJA) into law, marking the biggest major overhaul of the U.S. tax code in over 30 years. This bill amends the 1986 Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses.
This comprehensive tax bill has a variety of components that a ect both the single-family and commercial/multifamily industries. The bill preserves the ability to deduct up to $10,000 in property taxes and also preserves the mortgage interest deduction for both rst and second homes (though the cap on deductibility was lowered to $750,000). The following items were extremely important to those in the commercial real estate industry:
Business Interest Deduction for Real Estate and Like-Kind Exchange Rules for Real Property Preserved.
The new law preserves the Section 1031 like-kind exchanges for real property, which ensures that the cost of financing remains a ordable and real estate activity remains vibrant. This was very important for real estate investors; providing them the ability to continue a way to defer federal tax payments on realized gains by continuing to reinvest their gains on commercial real estate sales, in new “like-kind” real estate.
Low-Income Housing Tax Credit (LIHTC) and the Tax- Exempt Status for Private Activity Bonds (PAB’s) Preserved.
Keeping the tax-exempt status of PAB’s was crucial to preserving sound financing arrangements for affordable housing. Reduced corporate tax rates, from 39% to 21%, could a ect the demand for such credits, resulting in tax credit. The new law preserves the Low-Income Housing Tax Credit (LIHTC) and the tax-exempt status for private activity bonds (PAB’s), provisions that, in combination, help incentivise the continued development of a ordable multifamily housing. This is huge for the a ordable housing tax credit (LIHTC) developers who rely on the sale of such bonds and tax credits to fund their new developments.
Tom Crowe, EVP of Pedcor Investments, a very significant LIHTC developer in the Midwest, comments that: “PAB’s were not eliminated under the nal tax reform bill which helps to insure the new construction of roughly 800,000 affordable homes over the next decade. This is a great win for the many organizations which championed the continued use of PAB’s.” buyers not recognizing as much economic advantage in 2018, translating into a lower per tax credit dollar sales price, and ultimately less tax credit equity raised to invest for particular projects.
The TCJA changed the Alternative Depreciation System (ADS) life of such commercial residential and nonresidential property from 39 years to 20 years. Hopefully, accelerating depreciation and amortization schedules for “qualified improvement property” will offset some of this lost equity to the real estate owner/operators, by providing higher operating deductions for them in early ownership years.
*We are not attorneys, nor accountants. Please consult your tax advisor.