Commercial Investment Real Estate March/April 2019 | Page 20

LEGAL
BRIEFS
Forming a Tax Plan
Follow these tips to capitalize on tax reform.
by Paul Rosenkranz
Taxation of Pass-Through Entities
The Tax Cuts and Jobs Act permits a deduction of up to
20 percent of qualified business income from pass-through
entities such as partnerships, limited liability companies, and
S corporations, including real estate owned directly or through
a single-member LLC. Both individuals and trusts can take the
20-percent deduction. It is limited to the lesser of 20 percent
of an individual’s adjusted taxable income or the greater of:
• 50 percent of wages paid in the pass-through entities, or
• 25 percent of wages paid and 2.5 percent of the unadjusted basis
net of any 1031 deferred gain of qualified depreciable property
used in the qualified business.
A qualified property has a depreciable period that ends on the
later of 10 years from the date it was placed in service or the end
of its regular depreciable tax life. For example, a five-year asset
placed in service in 2011 expired in 2016, but it is still a qualified
property because 10 years from the date it was placed in ser-
vice expires in 2021. The 2.5-percent property provision clearly
benefits owners of real estate who often pay low or no wages.
Guaranteed payments — a common form of compensating
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March | April 2019
partners or LLC members for services rendered by them to the
entity — are not considered wages.
Proposed regulations establish aggregation rules that allow
taxpayers to combine properties used in separate trades or busi-
nesses to maximize the qualified business income deduction.
Investors can combine a high-income, low-depreciable-basis
property under the aggregation rules with a low-income, high-
depreciable-basis property to potentially increase the 20-percent
deduction. Individuals must consistently report the aggregated
group in subsequent tax years once aggregating multiple trades
or businesses into a single trade or business.
Gain from the sale of real estate, except for depreciation recap-
ture, is not considered qualified business income and, therefore, is
not available for the 20-percent deduction. Dividends from real
estate investment trusts are eligible for the deduction, whereas
interest, dividends, and capital gains are not.
Planning to maximize use of the deduction, particularly in
light of the new irrevocable aggregation election, is crucial.
Depreciation
The Tax Cuts and Jobs Act has continued the trend of favorable
depreciation changes, which may encourage more real estate
owners to make improvements to their properties. Qualifying
property acquired and placed in service after Sept. 27, 2017,
is eligible for 100-percent deduction in the first year. Bonus
COMMERCIAL INVESTMENT REAL ESTATE
T
he real estate industry generally fares well under the Tax
Cuts and Jobs Act of 2017, but many new provisions
heighten the importance of advance tax planning for
real estate investors.