By Robert J. McNeill, CPA
In the closing weeks of 2017, President Trump signed a tax reform bill called the Tax Cuts and Jobs Act. The 429-page law contains some pretty significant changes that may dramatically impact the multi-family real estate investment market.
Tax experts, pundits, and politicians alike are combing through the bill to see how it could impact their constituents. Like any bill of this size and scope, there is a lot in here that will both help and hinder multi-family owners. Below we take a look more closely at some of the ways the new law could possibly affect your business.
Part I: The Good
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is an attempt by Congress to make sure that wealthier Americans pay at least a 28% tax on all of their income. At one point there was a suggestion to eliminate the AMT, but that did not happen this time. With the new tax bill, the AMT was not eliminated, but the exemption amount was increased, as was the ceiling amount at which the AMT applies.
Like Kind Exchanges (1031 Exchanges) Survived for Real Estate Property
The new law does not change the current 1031 exchanges of real property! Real estate 1031 exchanges are important for small to medium-sized businesses and real estate investors as they allow tax-free exchanges of “like-kind” property and the deferral of capital gains.
However, the new law repeals like-kind exchanges for personal property. This could impact businesses who utilize the personal property exchange provision in Section 1031 to defer taxes on equipment, supplies or other intangible business assets. Examples of exchangeable personal property could include business assets, construction equipment, and fleets of autos or trucks.
The Carried Interests Loophole Remains
While all the focus on this was initially aimed at closing the loophole for “hedge fund guys,” this is good news for investors and groups that invest in real estate holdings. New tax law allows “carried interests” (a general partner or managing member of a real estate private equity fund or joint venture) to receive a higher percentage of distributions from the fund or venture once all investors receive back their capital.
There was a slight change in that the carried interest must be attributable to assets held for more than three (3) years (or, if the carried interest is sold, it must have been held for more than 3 years).
20% Deduction for Qualified Business Income of Pass-Through Entities
The 20% deduction for Qualified Business Income (QBI) was passed but has restrictions based on W-2 wages paid unless the income is below $157,000 for taxpayers filing single and $315,000 for taxpayers filing jointly.
Beginning in 2018, the Act provides for up to a 20% deduction for individuals for qualified business income earned through pass-through entities, such as partnerships and limited liability companies taxed as partnerships, S corporations, disregarded entities and trusts.
While in some instance this could result in an effective maximum marginal tax rate of 29.6% (plus unearned income Medicare tax, where applicable) but for most, the deduction is subject to several limitations.
One particular limitation may affect real estate specifically. It states that that a deduction is limited to the greater of (i) 50% of the W-2 wages paid with respect to the trade or business or (ii) the sum of 25% of the W-2 wages paid with respect to the trade or business and 2.5% of the unadjusted basis, immediately after acquisition, of all depreciable property used in the qualified trade or business.
This is something to keep in mind if you rely on services performed by employees of general partners or managing members or affiliated management companies.
100% Bonus Depreciation on Personal Property Items
With this new bill, you will be able to write off the entire amount of the personal property item (as long as it has a useful life of fewer than 20 years.) Under current guidelines, you are only able to write off 50%.
$11 Million Threshold for Lifetime Gift Exclusion
Under the new plan, the threshold for lifetime gift exclusion amount will be $11.2 million. In 2017, the maximum was $5.49 million. This means that each person can now give their heirs up to $11.2 million in wealth and married couples can give heirs up to $22.4 million without being subject to gift transfer taxes. This makes succession planning a lot easier for taxpayers with multiple and/or high-value properties.
About the Author
Bob McNeill is full service Certified Public Accountant and small business consultant. He services a wide variety of clients ranging from individuals to medium-sized corporations, partnerships, limited liability companies, and sole proprietorships. Bob specializes in income and estate tax planning and preparation, retirement planning, business consulting, and personal financial planning including education needs. You can reach him directly at (781) 224-9900 or at www.McNeillCPA.com