Wondering how the 2018 tax law changes will affect you as a real estate investor? We’re all looking for a higher return on investment and ways to maximize our income in the following years. Thankfully, the real estate investment landscape looks like it will benefit greatly from the most recent tax bill.
The latest tax reform is the biggest in the last 30 years. Announced in December 2017 and signed into effect in January 2018, the new tax bill is certain to have an impact on real estate, particularly commercial real estate. The new tax bill also changes tax rates, income ranges, tax exemptions, standard deductions, and more. It will affect self-employed people, small businesses, families with children, and large corporations. Changes might not be apparent immediately, but in the next few years, most Americans will begin to notice a difference in their taxes.
But how exactly will commercial real estate change, and how can we be prepared for those changes? It’s impossible to know for sure how the future will unfold, but here are some predictions for how the 2018 tax law changes will impact real estate.
Great news for commercial real estate investors, developers, and owners: This tax bill offers more benefits to you than it does to residential real estate investors. In general, you’ll probably have lower tax rates if you own commercial property—meaning a higher ROI for your real estate investments.
Here are some of the ways it has the potential to help you out.
- • The standard deduction has almost doubled. Single filers now get $12,000, up from $6,350, and married filers will now get $24,000 in standard deductions. Now, many experts estimate that the vast majority of taxpayers will pick the standard deduction instead of itemized deductions. This isn’t specific to real estate investors, but it’s one of the biggest changes that is worth noting for everyone. In fact, it could even lower housing prices if taxpayers choose the standard deduction instead of taking advantage of the mortgage interest deduction.
- There might be more renters in the new real estate market because now, there are fewer property tax incentives to owning a home. Some people who would have bought a house for the tax incentives might choose to rent a place instead. This increase in demand will be great for anyone investing in multifamily units!
- Real estate investment income is now eligible for a new 20% deduction. This can greatly reduce the taxes you’ll have to pay next year if you are a real estate investor.
- Some commercial real estate investors will gain the opportunity to deduct the cost of properties as expenses rather than having to capitalize the cost of the property. The limit is now increased from $500,000 to $1 million.
- In addition, owners can deduct the full property cost in the same year that they acquire the property. Before, they were only able to deduct 50% in the first year.
- Pass-through entities like LLCs and partnerships will now only pay a maximum of 37%. The new law also allows for a 20% pass-through deduction. When you combine these two together, you benefit from a new top marginal tax rate of 29.6% on real estate investments.
- It will be more lucrative to own (or own shares in) commercial real estate properties like office buildings and multi-family units, rather than single-family homes.
- CRE property owners can deduct mortgage interest on their properties in full.
- C corps with lots of net income will get a flat tax rate of 21%.
- There are new rules for expensing when acquiring new properties, which means that investments can recover costs more quickly.
- People who invest in large corporations might see higher ROIs. The CEOs of some major corporations have announced that they’ll use their tax cuts to pay dividends to shareholders.
Some of these tax laws might apply to you, while others might not impact your financial situation at all. Speak with your tax advisor if you want to know exactly how you can use the tax bill changes to improve your return on investment.
While this bill won’t “hurt” you as a real estate investor, there are a few things worth noting:
- Even though this tax bill will be great for real estate investors, you won’t see any huge, immediate changes.
- The 20% deduction only applies to income, not capital gains. If your investment strategy depends on price appreciation, you won’t get any tax sheltering.
- Businesses can now deduct the cost of depreciable assets in one year, but this doesn’t apply to structures—only equipment and other depreciable improvements.
- Most of the new rules—mainly the ones targeting individuals, rather than businesses—will expire after 2025, so these laws are fairly-short term, and it’s impossible to know how things will change when this set of laws expires.
- Most experts predict that higher-income families and businesses will benefit from the tax reform more than middle-class individuals will.
- Before, investors were able to deduct interest from home equity lines, but now you will not be able to save any money on tax deductions from home equity interest.
You won’t notice immediate changes because of this tax bill, but over time, you’ll notice that the tax bill will kick off long-term changes that will increase the value of your investments. As a commercial real estate investor, you are in a good position to grow and thrive.
Please note that everyone’s financial situation is different, and you shouldn’t use the information in this article to reform your investment strategies. Make sure to talk to a tax advisor to figure out how the new tax bill will affect your investments. And in the meantime, happy investing!