Massive tax reform means many changes to the way business is conducted and how real estate owners make plans. The Commercial Real Estate industry had many issues in the balance of the recently passed Tax Reform. Our National Association of REALTORS® legislative representative, Maggie Fitzgerald, compiled the following outlining the changes you should know about:
Major Provisions Affecting Commercial Real Estate
- Like-Kind Exchanges: The final bill retains the current Section 1031 Like Kind Exchange rules for real property. It repeals the use of Section 1031 for personal property, such as art work, auto fleets, heavy equipment, etc. The exclusion of real estate from the repeal of 1031 like-kind exchanges is a major victory for real estate stakeholders, who had fought hard to preserve the provision for several years, and against long odds.
- Carried Interest: The final bill includes the House and Senate language requiring a 3-year holding period to qualify for current-law (capital gains) treatment. Again, real estate stakeholders prevailed against long odds to preserve the incentive of capital gains treatment for carried interests in the final legislation.
- Cost Recovery (Depreciation): The final bill retains the current recovery periods for nonresidential real property (39 years), residential rental property (27.5 years) and qualified improvements (15 years). The bill also replaces separate definitions for qualified Restaurant, Leasehold, and Retail improvements with one definition of “Qualified Improvement Property.”
- Qualified Private Activity Bonds :The final bill retains the deductibility of qualified private activity bonds used in constructing affordable housing, local transportation and infrastructure projects and for state and local mortgage bond programs. The House bill would have eliminated the use of private activity bonds.
- Low Income Housing Tax Credit: The final bill retains current law. However, a lower corporate rate will negatively impact the value of the credits in the future, and will result in less low-income housing being developed.
- Rehabilitation Credit (Historic Tax Credit): The final bill repeals the current-law 10% credit for pre-1936 buildings, but retains the current 20% credit for certified historic structures (but modified so the credit is allowable over a 5-year period based on a ratable share (20%) each year). The House bill would have entirely eliminated the Historic Rehabilitation Credit.
- Provisions Not Included in the Final Bill: Rental Income Subject to Self-Employment Tax. The House-introduced bill would have subjected rental income to self-employment taxes. This provision was dropped from the House (and final) bill.
- EB5- The EB5 program was extended until January 19th and tied to the continuing resolution (CR). At the moment we believe a long-term reauthorization is unlikely to move as a stand-alone bill and will be included in any spending measure approved. If there is any large immigration reform legislation (to deal with DACA, border, etc) it is likely this program would be separated from the CR then but stay tuned…
- HVCRE– See this link: https://www.nar.realtor/washington-report/nar-comments-on-capital-requirements. NAR believes the changes can be positive but made suggestions on areas of improvement in both our letter as well as a commercial real estate coalition about unintended consequences.
What’s Next- We are hopeful a transportation/infrastructure bill happens this year. Congress is working with a shorter calendar this year though due to the elections and early movement on this issue will be key if something is going to happen in the 115th Congress. Additionally, association health plans may gain some traction this year.