Real Estate

Tax Reform Impact on Commercial Real Estate

Happy New Year,

With the Tax Cuts and Jobs Act (TCJA) now enacted into law, many commercial real estate owners may be wondering how some of the provisions will affect current and future ownership of commercial real estate investments. To help shed some light of the potential impact of the TCIA on commercial real estate, the Cargile Industrial Group provided a summary of commercial real estate-specific details from the TCJA which was prepared by the National Association of Industrial and Office Properties (NAIOP). NAIOP is a national organization that has been around for 50 years and comprises 18,000+ members, including developers, investors and real estate professionals.

The following are six key components of the TCJA and related impact to you as a property owner. (NOTE: the actual impact on your individual tax situation should be discussed with your CPA or tax attorney):

LIKE-KIND EXCHANGES: Section 1031 (“1031 exchanges”) real estate like-kind exchanges are preserved under the new tax regime; however, starting in 2018, like kind exchanges of personal property will no longer be permitted.

  • Potential Impact: Section 1031 is an incredibly important vehicle to facilitate tax deferment resulting from investment property sales. Keeping the 1031 code will continue to encourage sellers who wish to defer taxes to reinvest in properties. The impact, barring any major economic changes, will be strong demand and higher prices for a variety of investment properties.

CARRIED INTEREST (CAPITAL GAINS): The TCJA changed the minimum holding period of investment properties from one year to three years in order for an owner/seller to get capital gains treatment.

  • Potential Impact: This change should not have a dramatic impact on the commercial real estate market in the near term. Since the 1031 exchange scheme is still in place, an investor with a short-term investment could still utilize the 1031 exchange to defer taxes if the investment is held less than three years.

INTEREST DEDUCTIBILITY: For a real estate trade or business, the full deductibility of interest payments is maintained.

  • Potential Impact: This change should not have a dramatic impact on the commercial real estate market since real estate trades or real estate businesses can already deduct interest payments.

COST RECOVERY (DEPRECIATION): The TCJA now allows for businesses to fully expense (100%) the cost of qualified property put into service between Sept. 27, 2017 – January 1, 2027. Used property is now also available for the 100% bonus depreciation.

  • Potential Impact: It would appear this would encourage businesses who wanted to make certain qualified property investments to start making those investments this year. The bonus depreciation should pave the way for business investment/growth, which would have a positive impact on the commercial real estate market.

CORPORATE TAX RATE: Top corporate tax rate reduced from 35% to 21%

  • Potential Impact: This dramatic reduction in the corporate tax rate will directly help businesses, which should free up cash flow for investment and expansion. The commercial real estate market should directly benefit from businesses routing lower tax liabilities into growth and expansion.

ESTATE TAX: Current exemption thresholds doubled for individuals and married couples from $5.6 million to $11.2 million and $11.2 million to $22.4 million, respectively.

  • Potential Impact: Heirs to wealthy estates should be ecstatic about this increase as it may provide the needed relief on selling assets to settle estate tax bills. The impact on commercial real estate, in some cases, will be continued ownership of a generational property and, conversely, fewer buying opportunities.

On the whole, the above changes should provide positive momentum moving into 2018 and beyond. An experienced and knowledgeable real estate professional will ultimately help guide you on the best strategy for your real estate investment. To discuss the strategy of your property or properties, contact the Cargile Industrial Group at Voit Real Estate Services today.

10 Year Treasury Watch

Recent news has led us to believe we may see this yield rise in the next few years. In 2008, the Federal Reserve attempted to stop the bleeding and stimulate the economy by purchasing government treasuries. Now, with a balance sheet of 4.5 trillion and interest rates historically low, they are potentially looking to unwind. Selling off their assets will lower the price of bonds and send yields upwards. An increase in this yield has several ramifications for your real estate. First, the value of your property will go down. As interest rates rise, cap rates follow suit, roughly three months behind. Higher cap rates lower the value of your property. Second, an increase in this yield makes other safe investment opportunities more attractive. Staying informed can allow you to make the best decision for you and your real estate.