Commercial Real Estate Tax Reform

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How the tax reform plan will affect commercial real estate – From INMAN

“The tax plan’s authors left an array of tax subsidies in place for commercial real estate developers and owners, who fared far better than individual homeowners. Unlike homeowners, those in the commercial real estate market didn’t suffer a repeal of a longtime tax subsidy or get slapped with something new.

“Commercial real estate really dodged several bullets here,” John Pickering, a partner in the real estate practice of Balch & Bingham, a Birmingham, Alabama firm focused on the Southeast, said in a phone interview. “There’s nothing in here that cries out ‘tremendous new opportunities that didn’t exist before.’ It’s more like let things continue.”

And that’s great news for the commercial real estate industry.

The new tax law leaves unchanged the provision known as the 1031 Exchanges. Sellers of commercial properties will still be able to defer paying capital gains taxes on such sales if they use the proceeds to purchase another similar property.

Tax-free exchanges of “like-kind” property have long-fueled transactions, and are likely to continue to do so.

Though earlier versions of the Republican tax plan had eliminated the 1031 provision, the subsidy ultimately survived.

The same can’t be said for personal property, which will no longer be given a deferral on capital gains.

“That was huge because a very large percentage of commercial real estate and sales are done through 1031s,” Pickering said. “If that had gone away, people would try to structure deals around that, but you’d probably end up with a lot of people unwilling or unable to sell buildings because they’re fully depreciated and can’t afford the tax hit.”

Another plus for commercial developers is that the historic tax credit also survived the Republican’s rule-writing process.

Renovations of buildings listed on the national registry will continue to receive a 20 percent deduction.

In Birmingham, Alabama, for example, more than two-dozen older, historic buildings have been renovated in its downtown over the past 10 years, Pickering said. Normally, renovating such structures is prohibitively expensive. But with a combination of local, state and federal historic tax credits, such projects are possible. It’s a scenario that’s been replayed throughout urban centers, large and small, in recent years. “That’s really brought our downtown back in a way that wouldn’t have happened without those credits,” he said.

Other credits were also maintained. Among them, the New Markets Tax Credit Program that offers subsidies for development projects that bring jobs to low-income areas. Private activity bonds were also sustained, a possible precursor to an expansive federal infrastructure bill.

As a group, real estate developers came out ahead. Like real estate agents, developers will be able to more easily establish themselves as a “pass-through” business thereby having 20 percent of their income taxed at a business rate rather than a much higher business rate.” From INMAN. Follow link to see full article.