In these final months of 2018, we are going to be reviewing the effects of the Tax Cuts and Job Act (TCJA) on your tax strategy and planning for next year. We briefly outlined some of the most important changes in January, May, and June and are just continuing our practice of keeping you informed about events and changes that impact your accounting and tax planning strategy. In this week’s post, we’ll summarize some changes in the TCJA that affect those in the real estate industry. The changes in the TCJA are generally applicable to the 2018 tax year and beyond – unless otherwise noted.

Summary of Important TCJA Changes To Real Estate

Like-Kind Exchanges

While the TCJA still applies to the exchange of real property, it now excludes exchanges of personal or intangible property. It’s worth noting that the exchange of a properties that are held primarily for sale is still unqualified as a like-kind exchange.

Carried Interest

After the TCJA, the holding periods for certain carried interests is extended to three years. In the near future, the IRS will be issuing regulations that will serve to clarify the tax laws regarding carried interest. Stay tuned!

Depreciation

Unifying the definitions for “restaurant”, “leasehold”, “retail” improvements under the single definition of “qualified improvement property”, the TCJA retained the existing recovery periods for nonresidential real property (39 years), residential rental property (27.5 years), and qualified improvements (15 years). The alternative depreciation period for residential property was shortened from 40 years to 30 years. Learn more about the changes to recovery periods on the IRS website.

Rehabilitation Credit (aka Historic Tax Credit)

Under the TCJA, the 20 percent that was previously taken in the building’s first year of service will now be taken over 5 years. The 10 percent rehabilitation credit for buildings constructed prior to 1936 was eliminated. Read more on the IRS website.

Qualified Business Income

Sole proprietorships, partnerships, trusts, and S-corporations may be able to claim a new deduction, formally referred to as the “qualified business income deduction.” Though you can read about the QBI deduction and eligibility specifics on the IRS website, essentially the deduction is limited to non-personal service businesses in specific fields. Though the real estate industry is not mentioned as in the list of generally approved fields, the personal service restriction does not apply to business owners with taxable income less than $157,500 (single taxpayers) or $315,000 (married joint filers). If your non-personal service income is above those thresholds, you may still be able to claim a full of limited 20% deduction (this is known as the wage and capital limit exception), though it depends on the amount of W-2 wages paid by your business and the UBIA of your qualifying property.