Effect of 2017 Tax Reform for Commercial Real Estate Investors


The Tax Cuts and Jobs Act that was signed into law on December 22, 2017 is likely to have a net positive impact to commercial real estate values.

100% Write Offs – Write off 100% of certain capital expenditures in the year they are incurred, as opposed to depreciation over their remaining useful life. This could be very beneficial for investors in commercial real estate as this would result in a significantly larger “paper loss,” which they would be able to use to offset non-real estate-related income from their taxes.

20% Deduction for Pass-Through Investments – Members, owners, or partners of pass-through entities will be able to deduct 20% of their taxable income earned from pass-through entities. This deduction represents a maximum effective tax rate of 29.6% for pass-through income. This is a large benefit to real estate investors and will further strengthen the after-tax benefit of investing in the asset class, but begins to decrease on income above $315,000 and disappears above $415,000.

EXAMPLE

LLC Profits: $100,000
20% Deduction: $20,000
LLC Taxable Profits: $80,000
New Tax Rate: 37%
Individual Investor Tax Bill: $29,600
Effective Tax Rate: 29.6%

3-Year Hold for Capital Gains/Carried Interest – Capital gains on carried interest is now redefined as investments held for longer than three years. This change may encourage sponsors to hold assets longer and could reduce the transaction volume in commercial real estate.

Increased Domestic Liquidity – The corporate tax rate was cut from 35% to 21% and individual tax rate for ordinary income was cut from 39.6% to 37%. The new tax law also lets U.S. corporations bring back an estimated $2.5 trillion to $3 trillion of foreign profits to the U.S. at a tax rate of 15.5%, versus the current corporate tax rate of 35%.  Additional domestic liquidity in the U.S. will likely create general economic stimulus. in every corner of the U.S.

Limits on State and Local Tax Deductions – SALT deduction limits are not likely to have dramatic impact on values as they are offset by the benefits above. For high SALT states like California, the negative impacts are mitigated by its terrific infrastructure with world-class universities, job-creating companies and lifestyle benefits for those companies who wish to attract talent.