This posting is a part of a 3-part series. The full article will be available in the coming weeks. Click here to read Part 1.
By Alexander J. Narcise, CPA and contributions from the entire real estate accounting services team:
- Michael Kroll, CPA
- Steve Warholak, CPA
- Michael Bodrato, CPA
- Kyle Pennacchia, CPA
- James Jenco, CPA
- Ken Trainor, CPA
- Phil London, CPA
- Chris Gati, CPA
- Charlie Komack, CPA
The Internal Revenue Code has historically provided many planning opportunities for real estate investors and developers. In our practice, we have been able to save real estate clients a significant amount of tax staff about so we can deliver the highest quality service to our real estate clients and the industry as a whole.
The Internal Revenue Code has always been favorable to real estate investors and developers to help drive the overall contribution to the economy. Wiss is in a great position to advise the real estate industry on all the new changes. If you or anyone ever has any questions, don’t hesitate to contact someone on the team.
Below are highlights of the new tax policy that will affect real estate the most.
- Cost Segregation Study is a tool that we have used for years to help clients’ shelter income and use tax dollars for other real estate projects. Cost segregation is also a tool that has been used to capture the time value of money. Deductions today are more valuable than they are tomorrow. The benefits of these studies are continuing to be important in order to ensure the proper breakout between real estate and assets that will qualify for 100% expensing. One of the many techniques we have used in the past, such as 179D and IRC 45L, are still up in the air if they will be a part of the new tax code. 179D and IRC 45L are energy deductions and credits for energy efficient developments. We have saved clients significant tax dollars with these energy incentives. Hopefully the expired 179D and 45L provisions will be back in play, but it is uncertain at this time.
- The estate tax exemption has now doubled from $11.2 million to $22.4 million for a married couple. This is a good opportunity to give assets away before it sunsets and goes back to the current exemption adjusted for inflation in the year 2025. However we must wait to see if Congress enacts a law for the claw back of gifts made between the effective date of the new law and the expiration of the new estate tax exemption. If there will be no claw back of gifts it will be a great opportunity to gift now before the exemption decreases in 2025.
- The carried interest for all my real estate “Promoters” will now have to hold the property for 3 years in order to take advantage of capital gains. However in my experience with promoters it usually takes 3 years to reach the IRR hurdles so this should not impose any significant issues.
- On a personal tax note limiting the State and Local deduction (SALT) appears to be punitive to certain states (NY, NJ) However, over the years because of inflation and rising incomes a lot of people crept into the Alternative Minimum Tax (AMT). The AMT does not allow a deduction of SALT. If you’re in AMT the elimination of the SALT deduction may not have a significant impact on your future taxes.
- The new corporate tax rate is 21% but I wouldn’t go throwing real estate into a C-Corporation any time soon. Remember C-Corporations have a double taxation, one at the entity level and one when dividends are distributed. It’s appealing but I would be worried about the staying power of this law long term. As you know politics is crazy these days and if there is a shift of power who knows what will happen. It’s great for public companies and if you are required to be taxed as a C-Corporation but I would advise against it for the real estate crew.
- Pre-tax reform, taxpayers received bonus and IRC 179 depreciation on certain non-residential leasehold improvements that was defined as Qualified Real Property. Under the new law, Qualified Real Property has been expanded to include big ticket items such as roofs, HVAC systems, fire alarm systems and security systems. Additionally, the definition and requirements of qualified real property have also been simplified.
- Local lobbying expenses are now disallowed for tax purposes as of 12/31/2017. Real estate professionals should be aware of this when donating to local politics.
- Some of the other more applicable changes to your individual tax return are the percentage limit for charitable contributions has increased from 50% to 60%. Home mortgage interest limited to acquisition indebtedness of $750,000 for married joint returns ($375,000 for single) for newly purchased homes and the deduction of home equity debt is no longer allowed
- As of January 1, 2018 there will no longer be a deduction for entertainment expenses. Furthermore the 50% deduction for meals stays until 12/31/25; however, they have expanded that 50% limitation for in-house staff meals which used to be 100% deductible. Travel remains 100% deductible.
In the end the real estate community will benefit from the new tax policy as discussed above but will need to be well thought out and in constant communications with their accountants to ensure the advantages and disadvantages are well thought out. As I sit here on a snow day and write this I feel great about communicating these issues in my MANIFESTO. I look forward to speaking to you about these topics. Don’t hesitate to reach out, there are no silly questions. Nobody has this all figured out yet. It will take good communication and collaboration to be successful. Thank you for reading, and happy planning and best to everyone in 2018!
Alexander J. Narcise, CPA, is the partner in charge of the Real Estate & Construction Services Group, specializing in all areas of accounting, audit and tax for family owned real estate businesses. For more information, contact Alex at ANarcise@wiss.visioncreativegroup.com or 973.577.2859.