6B — November 24 - December 7, 2017 — Construction Management & Design-Build— ODM — M id A tlantic
Real Estate Journal
www.marejournal.com
C onstruction M anagement & D esign -B uild By Brian T. Lovett, CPA, CGMA, JD, Withum Recently released Republican Tax Proposals and the Impact on the Real Estate Industry I n the lead-up to the great reveal of the House repub- lication tax plan, named
of all fixed assets and the end of depreciation as we currently know it. The Tax Cuts and Jobs Act does vastly expand the ability to immediately deduct trade or business assets, how- ever that change specifically excludes real property assets acquired by real estate busi- nesses. The Tax Cuts and Jobs Act calls for immediate expensing of assets with a class life of 20 years or less. This immediate expensing would apply to all assets placed in service before January 1, 2023, giving busi- nesses a 100% depreciation
discussed and well publicized changes specifically exclude real estate trades and busi- nesses and many other benefits enjoyed by those in real estate trades and businesses were not touched with this version of tax reform. This article will explore the changes from the perspec- tive of the real estate industry. Throughout the last election cycle, much was made of im- mediate expensing of trade or business assets. Talking points repeated on the campaign trail lead most people to believe that the proposed tax reform would call for immediate expensing
rate for qualified assets for the next five years. As it relates to real estate trades and busi- nesses, building assets would not fall under this immediate expensing as the class life is longer than 20 years. However certain shorter lived property, such as qualified leasehold im- provement property and land improvements, would qualify for immediate expensing under the Tax Cuts and Jobs Act. Unfortunately, the legislation specifically excludes assets used in certain types of trades or businesses from its provi- sions. The excluded trades or
businesses are defined in the section of the legislation cover- ing interest expense. One of the give backs that was regularly discussed in conjunction with immediate ex- pensing was the disallowance of the net interest expense deduc- tion (excess of interest expense over interest income). The Tax Cuts and Jobs Act does limit the net interest deduction for businesses with average annu- al gross receipts of $25,000,000 or more. The proposal provides that interest expense in excess of 30% of a company’s EBITDA would be disallowed as a deduc- tion. Any disallowed deduction is carried forward for five tax years. As written, the legisla- tion would exempt certain busi- nesses from the definition of a trade or business for interest limitation purposes. One such exemption goes to real property trades or businesses as defined in the current IRC Sec. 469(c) (7)(C). This includes real prop- erty development, construction, rental and management. With this reference to real estate trades or business, the new legislation excludes real prop- erty trades or business from the opportunity for the immediate deduction of acquired assets, but also excludes those same businesses from the limitation on deductible interest. In addition to concerns of immediate expensing and the deduction of interest expenses, one of the real estate indus- try’s sacred cows was on the chopping block as tax reform was debated in Congress. In discussions, there was some concern regarding the contin- ued availability of tax deferred exchanges under IRC Sec. 1031. Fortunately for those in real property trades or businesses, the Tax Cuts and Jobs Act, while limiting the applicabil- ity of Sec. 1031, does nothing to change its applicability to real property. Thus, taxpay- ers in real property trades or businesses may continue to use the provisions of Sec. 1031 to replace property in a tax- deferred way. On the Senate side, there were some significant differ- ences in the proposal. With respect to the net interest expense deduction, the Senate proposal extends that limita- tion to real property trades or businesses. It does, however, give real property trades or businesses the opportunity to continued on page 26B
the Tax Cuts and Jobs Act, t h e r e wa s much uncer- tainty about various tax i n c e n t i v e s that largely benefit the rea l es tat e
Brian T. Lovett
industry. With the release of the plan on November 2nd, those in real estate trades or businesses can breathe a huge sigh of relief. Many of the much
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