BPM Real Estate Insights: Spring 2018 Volume 01 | Page 6

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BPM Real Estate Insights
Real Estate and Taxes in 2018: the
Good, the Bad, and the (Pretty) Good
By Greg Dresdow
This article was featured in the March 1, 2018 issue of the San Francisco Business Times.
L
ast year was a strange political year that ended
with the passage of the most significant federal
tax reform in the last three decades. The Tax Cuts
and Jobs Act (TCJA) was hastily rolled out and passed,
creating confusion about what its effects would be. Adding
to the uncertainty in the Bay Area was how the new tax
law would affect our commercial and residential real estate
markets, which are quite different from those in most parts
of the country because of the high Bay Area property costs. Bay Area—where home prices are significantly higher than
the national average. The tax implications may not be that
great here: home mortgage interest is now deductible on
mortgage amounts up to $750,000, down from $1 million.
In addition, only $10,000 of state income and local property
taxes are deductible. For people who were previously
in the alternative minimum tax (AMT) posture, these
provisions only mean the loss of about $300 per month in
after-tax benefits.
As with most laws, the real world effects will be a mixed bag
for homeowners and commercial landlords. Below are some
insights on how this might play out in 2018 and beyond. In terms of the business interest deduction, companies with
annual gross receipts of greater than $25 million can only
deduct their interest payments up to 30 percent of their
adjusted taxable income. Real estate companies can, however,
elect to not have these provisions apply if they use longer
depreciation lives.
The Good
One of the advantages starting this year will be more expensing
under the bonus depreciation rules, which will benefit
property owners with certain eligible property. Property
owners can now expense 100% of these improvements up
to $1 million, an increase from $500,000 previously. In
addition, this amount can now include items such as heating
and air conditioning systems (HVAC), roofs, fire protection,
alarms, and security systems. This allows owners to get tax
benefits in the year they make improvements to the property
rather than over time.
In addition, there is a brand-new 20% business deduction
from qualified pass-through business income. This deduction,
however, has limitations based on wages and qualified
property basis.
The Bad
When the Tax Cuts Jobs Act passed, homeowners across the
country were understandably nervous about the ramifications.
This concern was especially palpable in areas—including the
Prior law allowed for qualified improvement property to be
depreciated over 15 years and eligible for bonus depreciation.
The new law intended to maintain and enhance this treatment,
but a drafting error has left the bonus depreciation and the
depreciable life uncertain (now 39 years instead of 15 years).
The (Pretty) Good
Then we get to the parts of the act that have the potential
for positively affecting taxpayers—but only if they’re in the
right industry.
One of the best tax strategies available to businesses over the
last few decades has been the so-called Like Kind Exchange,
which lets companies defer taxes by trading similar assets.
This option has been preserved, but only for the real estate
industry. So, if you own property, you can still swap
buildings in a tax deferred manner, but if you’re in any other
business, you are going to lose the ability to use this tax
deferral technique.