What Does the New Tax Plan Mean to Commercial Real Estate Investors?

Posted on March 14, 2018

It appears that the Tax Cuts and Jobs Act can deliver some impactful benefits to commercial real estate investors and property rental businesses organized as pass-through entities, such as S corporations, partnerships and sole proprietorships.

In addition to retaining the tax-deferral benefits of 1031 exchanges of like-kind property, the new tax law introduces a tax deduction for “qualified business income” (QBI) that passes from a business through to its owners’ personal income tax returns. To qualify for the full 20 percent QBI deduction, an investor’s total taxable income must be at or below $157,500 for individual taxpayers or $315,000 for married taxpayers filing joint returns. When taxable income exceeds these thresholds, the QBI deduction will be limited to:

• The lesser of 20 percent of QBI, or
• The greater of:
  • 50 percent of the business’s W-2 wages; or
  • 25 percent of W-2 wages, plus 2.5 percent of the unadjusted basis (purchase price) of qualifying tangible depreciable property that generates trade or business income, including buildings, furniture, fixtures, and equipment.

Sounds confusing? It is. However, investors whose income exceeds the statutory thresholds may be able to maximize the new QBI deduction when they own or increase their investments in qualifying real estate. Investors may also consider whether restructuring their businesses will yield a more beneficial tax deduction. For example, under the new law, entities organized as C corporations can take advantage of a flat 21 percent corporate tax rate rather than a top individual rate of 37 percent. In all matters regarding the new tax law, investors and property owners should consult with qualified advisors to guide them through a maze of pitfalls and opportunities for minimizing tax liabilities.

The team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.