Last year, a new tax bill known as the Tax Cuts and Jobs Act went into effect, cultivating several notable benefits for the commercial real estate industry. According to the IRS, there is a long list of tax provisions that affect businesses, from income gains and losses to taxes and deductions. While the jury is still out on the lasting impact of these changes, the new legislation is forecasted to impact the CRE sector for the better.
Commercial Real Estate Tax Benefits
According to Connect, those who own or invest in commercial real estate can expect to benefit from the following:
- Mortgage Interest: Property owners can fully deduct mortgage interest on their commercial properties, and the owners’ net income will be taxed at 21 percent (down from 35 percent).
- Cost Recovery: CRE owners will take a 100 percent property deduction in the same year in which their assets were acquired. Previously, owners could deduct 50 percent of a qualified property’s cost in the first year.
- Pass-Through Taxation: Entities organized as pass-through, such as partnerships, S corporations, or sole proprietorships, are eligible for a 20 percent deduction. However, the deduction is not allowed in computing Adjusted Gross Income (AGI) but is allowed as a deduction reducing taxable income.
Tax Deduction Restrictions for Businesses
Like most deductions, these benefits come with a fair share of restrictions. WCRE provides concisely outlines the following need-to-know restrictions:
- Restriction 1: For the most part, the deduction cannot exceed 50 percent of your share of the W-2 wages paid by the business.
- Restriction 2: The W-2 limitations do not apply if you earn less than $157,500; $315,000 if married and filing jointly.
- Restriction 3: Certain personal service businesses are not eligible for the deduction unless their taxable income is less than $157,500 for singles and $315,000 if married. This refers to any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services.
- Restriction 4: The exception to the W-2 limit and the general disallowance of the deduction to personal service businesses is phased out over a range of $50,000 of income for single taxpayers and $100,000 for married taxpayers filing jointly.
- Restriction 5: The new tax law increased the maximum amount a taxpayer may expense under Section 179 to $1,000,000 and increased the phaseout threshold to $2,500,000.
- Restriction 7: The deduction for business interest expenses is now limited to the business interest income plus 30 percent of adjusted taxable income. Taxpayers with average annual gross receipts for the prior three years of $25 million or less are exempt from this limitation. Real estate businesses can elect out of the business interest deduction limitation, but at the cost of more extended depreciation recovery periods — 30 years for residential real property and 40 years for nonresidential real property. If a real estate business does not elect out of the interest deduction limitation, then residential and nonresidential real property depreciation recovery periods are maintained at 27.5 years and 39 years.
The new restrictions can get complicated, and if you’re unsure what portion of your property tax assessment qualifies as a deduction, it’s best to bring in the experts. MountainSeed’s highly experienced team of industry experts are prepared to walk you through all of your property tax needs. Contact us today to learn more about our services.