Big commercial real estate investors will benefit from tax reform
Loop North News

The Home Front

(Above) River Bank Lofts at 550 North Kingsbury as seen from Chicago River.

14-Mar-18 – Tax reform may take a bite out of the average home and condominium owner’s wallet, but there still are plenty of perks left for savvy commercial real estate investors.

Hessam Nadji “Investors generally perceive the new tax law as favorable, with many showing interest in the newly created 20 percent pass-through deduction,” said Hessam Nadji (left), CEO of Marcus & Millichap, commercial real estate specialists. “This represents a unique opportunity for investors to reconsider their portfolios in order to ensure they fully capitalize on new tax laws and maximize return on equity.”

However, Evanston-based tax consultant Tom Swigert of Thomas Swigert & Associates, says the 2018 Tax Cuts and Jobs Act is not as beneficial to the average American as experts say.

“Congress set up all the rules for real estate to provide tax benefits for landlords so Americans would have access to good, cheap housing,” Swigert noted. “However, tax reform gives landlords the idea that they can only get tax benefits by raising rents, so they can generate more profits.”

Congress wasn’t thinking of this concept when drafting the 2018 tax bill, Swigert believes.

“One result of reform will be that Americans will see more expensive housing costs,” Swigert said. “What if professional sports franchises go out of business when corporations stop buying blocks of season tickets? And, who knows how many restaurants will close from lack of business?”

According to Marcus & Millichap, here are some of the positives that wealthy commercial apartment owners and other investors are counting on to put big bucks in their pockets...

• Mortgage interest. While the new tax law reduces the average homeowner’s mortgage interest deduction cap to $750,000 from $1 million, real estate investors will be able to deduct mortgage interest on their commercial properties in full. Another perk for the big investor-owners is their net income will only be taxed at a 21 percent federal rate, down from 35 percent under former law.

• Cost recovery. Commercial real estate owners now can take a full 100-percent property cost deduction in the same year in which their assets were acquired. Currently, owners can deduct 50 percent of a qualified property’s cost in the first year, then continuing depreciation in the years following.

• Pass-through taxation. Entities organized as “pass-through,” such as partnerships and limited liability corporations, will pay a top individual federal tax rate of 37 percent. Additionally, the pass-through business income will be eligible for a 20 percent deduction. Combined, these provisions could lead to a top federal tax rate of 29.6 percent on business income, well below the current 39.6 percent.

It’s important to point out that the 20 percent eligibility applies to business owners with incomes higher than $157,500 for single filers or $315,000 for couples filing jointly, Marcus & Millichap noted.

20 percent deduction starts out with a little twist

Local tax consultant Tom Swigert says Uncle Sam gives investors a 20 percent deduction off their business profit or 20 percent of their taxable income, whichever is less.

Here’s an example. Let’s assume apartment rentals bring in a $100,000 profit, so the 20 percent deduction of profit is $20,000. However, if that is the investor’s only income, the $100,000 profit gets reduced by the 2018 standard deduction of $24,000. So, the tax deduction is only $15,200.

In other words, that’s $100,000 minus $24,000, which equals $76,000. And 20 percent of $76,000 is $15,200. Because the investor gets the smaller of the two, the 2018 tax deduction is only $15,200.

• Historic preservation tax credit. Developers wanting to renovate older structures can breathe a sigh of relief, according to Marcus & Millichap. The 20 percent tax credit for certified historic structures is still in place, with the provision that it’s claimed over a five-year period.

However, the 10 percent tax credit for rehab of non-certified structures built before 1936 is eliminated.

(Right) The Automatic Lofts on South Morgan Street in the West Loop.

The Automatic Lofts

• Like-kind exchanges. Real estate investors and residential owners who were relying on the 1031 Exchange to defer capital gains taxes also will be happy. Tax reform did not tinker with this important benefit.

While commercial real estate investors and owners likely will benefit under the new law, the story is somewhat different on the residential side for the average homeowner. Marcus & Millichap outlined the following negatives...

• Deduction issues. Tax reform almost doubles the standard deduction for single filers from $6,350 to $12,000, and for married couples from $12,000 to $24,000. This is a great move for filers who don’t itemize their deductions.

However, experts say it could be catastrophic for single-family homeowners, especially if their standard deductions are higher than the mortgage interest they pay on their homes.

National Association of Realtors pointed out that doubling the deduction really means reducing mortgage interest and property tax deductions. These deductions are key incentives for home ownership and help preserve the fabled American Dream.

“Congressional estimates indicate that only five percent to eight percent of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90 percent of taxpayers,” NAR analysts said.

And, while the new plan still allows interest deductions of up to $1 million on existing mortgage debt, interest deductions on new mortgages are capped at $750,000.

Thankfully, the Internal Revenue Service recently has ruled that home-equity loan interest deductions are still allowed, providing the money is used improve the property.

Another concern is tax reform’s elimination of state and local income tax and property tax deductions. The impact will be felt among single-family home, co-op, and condo owners, especially in urban cores and high-tax states, such as Illinois, experts predicted.

By Don DeBat | Loop North News | debatnet@aol.com

Published 14-Mar-18 3:23 PM

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