Federal Tax Reform Bill May Greatly Impact Commercial Real Estate

After a recent federal tax reform bill was approved, many are concerned with the law’s disproportionately negative impact on tax-heavy states, and the incentive for residents of such states to relocate to tax-free states such as Florida. 

However, there are very real and potentially significant impacts on commercial real estate in the South Florida area, as well as the industry at large. Although accountants, financial advisors, and tax attorneys are still working to explore all of the ways in which the tax reform bill will affect commercial real estate clients, there are certain impacts that are already clear:

Pass-through deductions

The tax reform bill now includes a pass-through deduction provision for Limited Liability Companies (LLC), partnerships, and S Corporations (S Corps). These corporate entities are common for businesses, as they help to protect individuals from personal liability. They have also provided the option for a pass-through taxation option, to avoid being taxed twice (once personally, and once through the company). With this tax reform bill, now commercial real estate owners operating under these entities can apply to receive a 20% tax deduction on net income from rental properties such as shopping centers, office buildings, apartment complexes, and industrial facilities. This change as well as others can now result in a large amount of savings for informed commercial investors who know what they are entitled to. 

Depreciation deductions

Before the tax reform bill was passed, commercial real estate investors were ale to claim a bonus deduction in the form of up to 50% of the property’s cost (on qualifying commercial properties.) After the tax reform bill was passed, this has now been upped to 100% if the property is “placed in service.” Additionally, the deduction limit for commercial property expenses has been increased from $500,000 to $1 million, giving commercial landlords incentive to invest in their properties.

Mortgage Interest

Under the tax reform bill, commercial property owners are able to deduct their mortgage interest in full, with the net income tax rate lowered from 35% to 21%.

Historic Preservation/Rehabilitation Tax Credits 

The pre-reform tax law provided for a 20% tax credit for those buildings, which have been certified as “historic.” Despite talk of eliminating this benefit under new tax law, this benefit has remained, so long as it is claimed over a period of 5 years.

Future Impact of Tax Reform Bill  

Thankfully for commercial real estate owners, this new tax reform bill will serve to positively impact their market. For states that lack state income tax, these helpful effects will only be compounded, as their market becomes more desired when compared with that of high tax/tax heavy states such as California and New York.

For both the states that experience an exodus of residents as well as those who experience an influx of the same, there may also prove to be negative affects including things such as overpopulation for those states receiving residents, and decreasing resources for those that are losing a decent portion of their population. It should be interesting to see just how many ways this reform will change not only the residential, but also the commercial real estate market.