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Commercial Real Estate and the New Tax Law

by Tom Branham, Washington D.C., April 2018

 

Passage of the Tax Cuts and Jobs Act (TCJA) is mainly a positive for commercial real estate. However, plenty of questions remain unanswered about the new federal legislation. That was the message at a recent webinar sponsored by NAIOP, the Commercial Real Estate Development Association.

 

Flow-through Deduction

 

The 20 percent flow-through deduction is probably the most talked about and least understood provision of the new tax law, according to presenter Crystal Christenson, a partner in the real estate and construction practice of Wipfli LLP. Does a business’ income qualify for the full 20 percent deduction? What’s the long-term plan for the flow-through entity? And what happens if rates change in the future?

 

Getting answers to these and other questions about the flow-through provision might call for some patience. For example, on the new provision’s specified service business limitation, Christenson had hoped to see some additional guidance from Washington by this summer. Now the guidance is more likely to emerge sometime in the fall.

 

Bonus Depreciation

 

There are other parts of the tax law that also need clarification. Under the revised rules for tax depreciation, real property acquired after September 29, 2017 may be eligible for the bonus depreciation rate of 100 percent, but only if it meets the definition of qualified improvement property (QIP).

 

Christenson said Congress apparently intended to add QIP to the TCJA provision describing property that qualifies for a 15-year recovery period, but neglected to actually do so.

 

Net Lease

 

For landlords that focus on net lease, uncertainty over whether the 1031 exchanges would or would not survive tax reform was a common talking point before passage of the TCJA.

 

Although 1031s survived, their scope was reduced: personal property is no longer eligible for the tax benefits of these like-kind exchanges. Only real property qualifies now.

 

Neither lawmakers nor the IRS are likely to act quickly to fill in all the missing pieces of the puzzle on some of the new tax law’s more ambiguous provisions for commercial real estate. Christenson encouraged the NAIOP webinar audience to have conversations with income and property tax professionals to determine how the legislation may pertain to them.