Tax Cuts & Jobs Act Impact on the Real Estate Industry

On December 22, 2017, President Trump signed Tax Cuts and Jobs Act as expected.  This bill is the biggest tax reform the United States has seen in over 30 years.  The bill contains many cuts and provisions related to individuals, businesses, and specific industries.  The real estate industry in particular will be impacted by the provisions related to expensing interest, depreciation and the recovery period for real property.

For tax years beginning after December 31, 2017 business entities, regardless of their form, will generally be subject to a limit on their interest expense deduction.  Unless an exemption applies, net interest expense in excess of 30% of the business’s adjusted taxable income will be disallowed.  The disallowance is determined at the taxpayer level and not the entity level.  For the period of January 1, 2018 through December 31, 2021, adjusted taxable income will be computed without regard to deductions allowable for depreciation, amortization, or depletion.  Exemptions apply for taxpayers with average annual gross receipts that meet a specific threshold and for real property trades or businesses that use Alternative Depreciation System to depreciate applicable real property.

Increased Code Section 179 expensing will allow taxpayers to expense up to $1 million dollars with a phase-out threshold amount increased to $2.5 million for property placed in service in tax years after December 31, 2017.  Additionally, the definition of “qualified real property” eligible for Code Sec. 179 expensing has been expanded to include some of the following improvements to nonresidential real property after the date such property was first placed in service:  roofs, ventilation and air-conditioning property, fire protection and alarm systems, and security systems.  Bonus depreciation, beginning for items placed in service after September 27, 2017 and before January 1, 2023, is increased from a 50% deduction to a 100% deduction.  Bonus depreciation, during this time period, is also expanded to apply to used property meeting specific acquisition requirements whereas under the old law bonus only applied to new.

Under current law improvements to real property fell into many separate definitions including, qualified improvement property, qualified restaurant improvement property, etc.  Each definition was different but all were generally depreciated straight-line over 15 years.  The new law removes the separate definitions.  Property placed in service after December 31, 2017 will now be qualified improvement property.  Assuming a technical correction is made to the final bill, qualified improvement property will be depreciated straight-line over 15 years using the half-year convention.  If no correction is made, all such property will be depreciated as nonresidential real property and depreciated over 39 years.  Additionally, an electing real property trade or business (real property trade or business electing out of the interest deduction limitation) must use MACRS ADS to depreciate any nonresidential real property, residential rental property, or qualified improvement property it holds.

Contact the Real Estate Team at HLB Gross Collins, P.C. to discuss in more detail the provisions identified above.

by Abigail Hampton, CPA