BPM's Real Estate Insights 2019 Volume 01 | Page 8

Eight Great 2018 Tax Reminders
By Helen Moulis
The 2018 tax filing season began on January 28th, marking
the start of the first tax filing that will reflect the Tax Cuts and
Jobs Act (“TCJA”) changes. It has been more than a year
since the TCJA was initially passed, so we are offering a brief
summary of the major changes to consider on your current
2018 tax returns.
1. IRC Section 199A
Section 199A is a pass-through deduction, known as
the Qualified Business Income Deduction (QBID), which
provides a deduction of up to 20% of taxable income for
taxpayers other than corporations. The deduction for each
taxable year will equal the lesser of the following:
• 20% of a taxpayer’s net taxable income excluding
capitals gains or
• 20% of the taxpayer’s qualified business income after
W-2 wage and qualified property thresholds.
To illustrate, assume Jill makes $200,000 in qualified
business income and has taxable income of $160,000. Her
IRS Section 199A deduction is the lesser of 20% of taxable
income or 20% of her Qualified Business Income. Hence,
her deduction is 20% of the $160,000 or $32,000.
Please see an additional article in this issue entitled “IRS
Section 199A—IRS Provides Trade or Business Safe Harbor
for Rental Real Estate.”
2. Section 1031 Exchanges
Prior to the TCJA, under IRC Section 1031 taxpayers
could defer gains on like-kind exchanges of personal and
real property. Following the TCJA, Section 1031 now only
applies to the exchange of real property. As of January 1,
2018 personal property exchanges of equipment, machinery,
vehicles, artwork, intellectual property and intangible assets
will not qualify for deferral.
3. Qualified Opportunity Zones
The TCJA created Qualified Opportunity Zones (QOZ) as
an economic development tool, designed to encourage real
estate investments in economically-distressed communities.
Investors can elect to defer tax on eligible capital gains by
investing that profit into Qualified Opportunity Funds (QOF),
which then invest in QOZs. In addition to deferral, investors
can exempt up to 15% of the deferred gain based on the time
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BPM Real Estate Insights
the investment is held. If the QOF investment is held for more
than 10 years, it will be eligible for an increase in basis equal
to the fair market value of the investment on the date it is sold
or exchanged. Therefore, there will be no gain recognition on
the appreciation in the investment if it is held for more than
10 years. To apply these tax benefits, the capital gain must be
invested in a QOF within the 180 day period from the date of
the sale, or from the end of the tax year if deferring gains from
another partnership investment.
4. B
 usiness Interest Limitation
There is a new limitation on business interest expense
deductibility. The taxpayer can now deduct business interest
expense up to the sum of business interest income, 30%
of adjusted taxable income, and the taxpayer’s floor plan
financing interest. The taxpayer can carry forward disqualified
interest. The limitation applies to partnerships and S
corporations at the entity level. Small business taxpayers with
less than $25 million in three-year average gross receipts are
exempted from the limitation. A taxpayer with a real estate
trade or business can make an election to be exempted
from the limitation. However, the electing real estate trade
or business must use the alternative depreciation system to
calculate depreciation.
5. Bonus Depreciation
Under the prior IRC Section 168(k), taxpayers could deduct
up to 50% of qualified property purchased. Following the
TCJA, taxpayers can now claim 100% bonus depreciation
on qualified property. The percentage phases down by 20%
each year for the years 2023 to 2026 and goes to zero for
2027 and after. Qualified property also now includes both
original use and certain used property.
However, qualified improvements property was removed
from the definition of qualified property, and thus ineligible for
100% bonus depreciation. Qualified improvement property
refers to the improvement to a nonresidential building’s
interior which are not for the enlargement of the building,
elevator or escalator, or the internal structural framework.
6. IRC Section 179 Deduction
IRC Section 179 property can now be expensed up to
$1 million instead of the prior $510,000. The phase-out
threshold is also increased from $2.03 million to $2.5 million.
In addition, the definition of Section 179 property has been
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