Tax Cuts and Real Estate Investing

Near the end of 2018, the Tax Cuts and Jobs Act passed by a vote of 224-12 in the House and 51-46 in the Senate, leaving the way clear for a complete reworking of the U.S. Internal Revenue Code.

Throughout the past few months, individuals and employers alike have delved into the pending changes to see what’s to come from 2019 onward. This includes those with real estate investments.

For hundreds of years, real estate investing has been a tried and true method for building wealth. But with the recent changes, there has been some uncertainty in the real estate market.

Today, we’d like to take a look at how these recent tax changes will affect our clients who partake in real estate investing.

Reduced Rates for Everyone

Under the previous Internal Revenue Code, the lowest tax bracket faced a rate of 15%, whereas the highest received a 39.6% tax rate. These rates are now down to 12% and 37%, respectively.

Similarly, corporations (C Corporations) will receive a massive tax cut from 35% to 21%.

REIT’s Are in

A REIT, or real estate investment trust, is a company that owns and operates real estate to produce income. They manage to accomplish this with capital generated by their investors.

Many REIT’s are established for the sake of pass-through income, meaning that 90% or more of their profit and losses are passed through to the investors. Because of the Tax Cuts and Jobs Act, those with income below $157,000 ($315,000 for joint filers) will receive a 20% tax deduction on their REIT dividends.

Full Depreciation in a Year

With 100% bonus depreciation, real estate investors can fully write off the depreciation in the first year for something that would normally take up to 20 years (or fewer) to depreciate.

This is a huge advantage for landlords as they can essentially write off a home improvement project to its fullest extent in the year that they go through with it. Not only can this reduce their taxable income, it can also provide them with an opportunity to enhance their earnings as the property’s value increases.

Plenty of Opportunity

For those who have been following major Chicago real estate development initiatives, such as Lincoln Yards or the Burnham Lakefront project, you may have heard the phrase “opportunity zone” thrown around quite a bit.

In essence, opportunity zones are areas that have historically been economically underdeveloped, so the government is providing tax incentives for firms to build there. This is all done to enhance economic and sociocultural growth, revitalizing what were previously underprivileged communities.

Summary

All in all, the Tax Cuts and Jobs Act provides quite a few benefits to real estate investors, and we’re just skimming the surface. To learn more about the recent changes, check out the additional reading below.

Otherwise, for all of your commercial real estate needs, please contact Michna Law Group here.

Additional Reading

Chen, Jiakai. “REITs Are the Big Winners from the New Tax Law.” Accounting Today, 2 May 2018, www.accountingtoday.com/opinion/reits-are-the-big-winners-from-the-new-tax-reform-law.

Conflitti, Jessica. “How Does the New 2018 Tax Law Benefit Real Estate Investors?” Real Wealth Network, 25 Feb. 2019, www.realwealthnetwork.com/learn/2018-tax-law-benefit-real-estate-investors/.

“Opportunity Zones Frequently Asked Questions.” Internal Revenue Service, 11 Jan. 2019, www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions.

“Potential Effects of Tax Reform on Real Estate Investors.” Internal Revenue Service, Internal Revenue Service, www.wellsfargo.com/the-private-bank/insights/planning/wpu-potential-effects-tax-reform-on-real-estate-investors/.