The tax reform package went through many changes before making it to the President’s desk for signing in December 2017. Now that the final details are known, investors can finally understand its impact. It turns out, tax reform is good for real estate investors for several reasons.
Retention of 1031 Exchanges
Earlier versions of the tax reform bill proposed eliminating 1031 tax-free exchanges. This would have been detrimental to commercial real estate investors. 1031 exchanges allow for deferral of property gains taxes when investment property is sold but funds are used to purchase alternate like-kind investment properties. Fortunately, this program was not repealed.
20% Tax Deduction
Under the final tax reform bill, a 20% deduction on taxable income is allowed for pass-through businesses such as LLC’s, partnerships, S Corporations, and real estate investment trusts. Most commercial real estate investment companies are structured in a way to qualify for this tax break. This is good news and can result in significant savings for many commercial investors.
Alternative Deduction Methods for Landlords
The tax bill also addresses landlords with only a few employees. Landlords can choose from two different deduction methods:
Option 1 – Deduct 50% of W-2 Wages
Option 2 – Deduct 25% of W-2 Wages and 2.5% of the cost-basis for qualified properties
By offering two options, landlords can select the one with the greatest tax advantage.
Lower Cost Recovery Period
Commercial properties previously had a depreciation period of 39 years. Under the tax reform bill, this has been reduced to 20 years. This is a significant change. A shorter time frame allows commercial property owners to take a larger depreciation on their properties, thereby reducing their tax liability. With the period reducing from 39 to 20 years, the depreciation amount each year will be almost doubled!
Higher Profits and Increased Values – Tax Reform is Good for Real Estate Investors
With the changes noted above, this tax reform is good for real estate investors. Most will see lower tax liability and higher profits. Ultimately, this will lead many investors to hold onto properties longer, thus reducing market inventory. Higher profits and lower inventory lead to increased property values, which is even more good news for commercial real estate investors. So, with that in mind, are you ready to invest in commercial real estate in Massachusetts? Contact ABG Realty to get started!