As the house and senate tax bills go through conference committee much remains to be resolved as the bills have many significant differences. The following is a list of 8 key differences owners and developers of real estate should watch. The final resolution will have a major impact on the real estate industry (and your tax bill) for years to come, so stay tuned!
Depreciation Lives for Buildings
Current Law – Commercial buildings are depreciated over 39 years and residential buildings are depreciated over 27.5 years.
House – No change from current law.
Senate – This bill would shorten the recovery period to 25 years for both commercial buildings and residential buildings. Changes would apply to buildings placed in service after December 31, 2017.
Depreciation Lives for Qualified Leasehold, Restaurant and Retail Property
Current Law – Qualified leasehold, restaurant, and retail property have a 15 year depreciable life.
House – No change from current law.
Senate – This bill would shorten the recovery period to 10 years for qualified improvement property. Changes would apply to property placed in service after December 31, 2017.
100% Expensing for Certain Business Assets
Current Law – For 2017, 50% expensing (bonus depreciation) is allowed on qualified property (only new property qualifies). For 2018, expensing will go down to 40%, 2019 will go down to 30%, and after that, it will no longer be available.
House – 100% expensing (bonus depreciation) would be allowed on qualified property (both new and used) placed in service after 09/27/17 and before 01/01/23. However, qualified property would exclude property used in a real property trade or business. This is not good for property owners because a “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
Senate – 100% expensing (bonus depreciation) would be allowed on qualified property (new property only) placed in service after 09/27/17 and before 01/01/23. Qualified property includes property with a depreciable life of 20 years or less used in a real property trade or business – good for property owners!
Section 179 Expensing
Current Law – Most taxpayers are eligible to deduct, in lieu of depreciation, the cost (subject to dollar limits) of most tangible personal property, and certain other property, used in the active conduct of a trade or business. The maximum amount that can be expensed is $510,000 for property placed in service in tax years beginning in calendar year 2017 ($520,000 for 2018), which is reduced dollar for dollar by the amount of Section 179 property placed in service during the tax year in excess of the investment ceiling ($2,030,000 for 2017 and $2,070,000 for 2018), also subject to taxable income limitations of the company.
House – Other than the limitation changes proposed, effective beginning after November 2, 2017, Section 179 property would include qualified energy efficient heating and air-conditioning property.
Senate – Other than the limitation changes proposed, the plan would expand the definition of Section 179 property to include certain depreciable tangible personal property (property used to furnish lodging). The plan would also expand the definition of qualified real property for improvements made to nonresidential real property. The types of improvements falling under that definition include roofs, heating, ventilation, air-conditioning property, fire protection systems, alarm systems, and security systems.
Limitation on Business Interest Expense Deduction
Current Law – Business interest generally is deductible with no limitations.
House – Deduction for business interest expense would be limited to 30 percent of adjusted taxable income and disallowed interest would be carried forward a maximum of 5 years. Real property trades or businesses would be exempt from this rule as well as any business with average annual gross receipts of $25 million or less.
Senate – Deduction for business interest expense would be limited to 30 percent of adjusted taxable income and disallowed interest would be carried forward indefinitely. Businesses with average annual gross receipts of $15 million or less would be exempt. Real property trades or businesses could elect out of this rule and if they elect out, the consequence is that the business would need to depreciate its assets under the alternative depreciation system (ADS) which has longer depreciable lives.
Rehabilitation Credit
The Rehabilitation Credit is a federal tax incentive to encourage real estate developers to renovate, restore, and reconstruct old and historic buildings.
Current Law – A credit is available for qualified rehabilitation expenditures incurred to rehabilitate and modernize qualified buildings. The credit is 20% of the amount spent on rehabilitation of certified historic structures and 10% for commercial buildings constructed before 1936. The credit is allowed for the tax year that the qualified rehabilitated building is placed in service.
House – Repeals this credit at the end of 2017 although there is a transition rule for expenditures that are incurred through the end of a 24-month period that would begin within 180 days after January 1, 2018.
Senate – Maintains the 20% credit on certified historic structures, but it would be claimed ratably over 5 years instead of all in one year. This bill repeals the 10% credit.
New Markets Tax Credit
The New Markets Tax Credit program attracts investment for real estate projects, community facilities, and operating businesses. New Markets Tax Credits are federal income tax credits used to encourage private investment in low-income communities around the United States.
Current Law – Over a 7-year period, a total credit equal to 39% of the amount invested in a qualified community development entity would be available.
House – Repeals this credit at the end of 2017.
Senate – No change from current law.
Qualified Private Activity Bonds
Qualified private activity bonds are federally tax-exempt bonds issued by or on behalf of local or state governments for the purpose of providing special financing benefits for qualified projects. These bonds allow nonprofits and some for profit entities to borrow money at less expensive rates and are commonly used to finance hospitals, private universities, and affordable housing projects.
Current Law – Interest on qualified private activity bonds is exempt from taxation at the federal level.
House – Repeals tax-exempt status for qualified private activity bonds.
Senate – No change from current law.
Reconciliation of the two plans may happen as early as today.For more information or to contact one of our Real Estate Services team members, please fill out the form below.
