A New Golden Age of Real Estate: How The Tax Act Of 2017 Will Affect Investment Sales

FEBRUARY 14, 2018 | THE PALOMAR GROUP

After the Tax Act of 2017 was passed, a veritable media frenzy descended on the details. Debates ensued over whether the corporate tax cut would actually help the middle class. But while there may be partisan controversy surrounding the Tax Act of 2017, there is one undeniable truth: Commercial Real Estate is getting a boost.

Taxes on Pass-Through Entities Have Been Cut

To begin with, Pass-Through entities are getting a very significant tax deduction. Pass Throughs including LLCs, LLPs, and the like will now be eligible for a 20% deduction for business related income, taking their rate from 40% to between 20-25%. Commercial Real Estate specifically is receiving massive cuts, since most benefits will go to LLCs with few employees and large amounts of depreciable property assets such as retail shopping centers and single tenant net leased assets. This is a huge increase in the profitability of pass-through entities, and can radically overhaul the financial benefits of owning commercial real estate.

Depreciation Deductions Are Here To Stay

Though Cost Recovery Depreciation deductions were originally on the table to be cut, the final version of the Tax Act Bill includes cutting the time to depreciate real assets from 39 years down to 25 years.  This allows for even more tax deductions to be utilized, further maximizing the tax benefits of commercial real estate.

Section 179 Expensing Now Includes Non-Residential Real Property

Not only has the amount of qualified property for immediate expensing increased to $1,000,000, but the bill expands the definition of qualified real property eligible for section 179 expensing to include any of the following improvements: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security. This is only applicable to improvements made after the property was put into service, but nonetheless, it provides substantial increases to the viability of renovations.

With so many financial boons to the real estate business and advantages to owning commercial real estate, there has never been a better time to invest. While both transaction volume and pricing have come down or at the very least stabilized over the past year, real estate funds have continued to raise money. According to REIS, global real estate funds currently have an astounding $249B of dry powder on the sidelines, most of which is targeted for North American real assets. This is a record high and many believe these funds will start to open their wallets and transact this year. While the “New Golden Age of Commercial Real Estate” might be hyperbolic, truthfully commercial real estate has been handed a massive number of tax advantages. For further information on how to get into commercial real estate, contact the Palomar Group here.