Tax Reform Legislation: Impacts on the Real Estate Industry



Tax Reform Legislation: Impacts on the Real Estate Industry

 

 

House vs. Senate Bill Specific to Real Estate Industry

 

House

Senate

Tax Rates on Pass-Through Entities

25% maximum tax rate on qualified business income (QBI) of partnerships, S corporations, and sole proprietorships; QBI is 100% of net business income from passive activities and 30% of net business income from active business activities (70% of active income is considered wage income taxed at regular individual income tax rates); REIT dividends with the exception of capital gain and qualified dividends are considered QBI

Individual taxpayers can deduct 17.4% of domestic QBI income from a partnership, S corporation, or sole proprietorship; deduction is limited to 50% of W-2 wages of the taxpayer; REIT dividends with the exception of capital gain and qualified dividends are considered QBI

Interest Deduction Limitation

In general, the amount of interest expense deduction is limited to net interest income plus 30% of adjusted gross income of the business; trades or businesses involving real property are excluded from the interest limitation

In general, the amount of interest expense deduction is limited to net interest income plus 30% of adjusted gross income of the business; trades or businesses involving real estate have an option of whether or not to be subject to the interest limitation; real estate businesses electing out of the limitation are required to use the alternative depreciation system (ADS) to depreciate nonresidential real, residential rental, and qualified improvement property 

Change in Statutory Recovery Periods for Real Property

No Change

Under the modified accelerated cost recovery system (MACRS) the statutory recovery period for nonresidential real and residential rental property is shortened to 25 years with ADS recovery decreasing to 30 years for residential rental property; separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated with these now in a catch-all category known as qualified improvement property subject to a 10 year recovery period and a 20 year ADS recovery period

100% Expensing of Qualified Property

100% expensing would be allowed for qualifying personal property placed in service after 9/27/2017 and before 1/1/2023; provision would not apply to real property or personal property used in a “real property trade or business” 

100% expensing would be allowed for qualified property placed in service after 9/27/2017 and before 1/1/2023; provision would not apply to real property

Like-Kind Exchange Rules

The like-kind exchange non-recognition rules would now only apply to exchanges of real property meaning any personal property (e.g. furniture and fixtures, appliances, etc.) included in the exchange would not receive non-recognition treatment.

The like-kind exchange non-recognition rules would now only apply to exchanges of real property meaning any personal property (e.g. furniture and fixtures, appliances, etc.) included in the exchange would not receive non-recognition treatment.

 

A blog post regarding the effects of Tax Reform for partnerships will be coming soon. 

 


About The Author

Daniel Quintana

Daniel Quintana of Kurtz & Company, P.C. in Dallas Texas.
https://www.linkedin.com/in/drquintana