The Tax Cut and Jobs Act is the biggest change to the US tax code in 30 years.
Little wonder, then, that there are provisions that need further clarification from the
Treasury. Here are the CRE-related ones that bother experts the most.
THE NEW TAX BILL
As 2017 wound to a close, homeowners went into a scramble. With the Tax Cut and Jobs Act limiting the value of the property tax deduction for 2018, many
were rushing to pay their property tax to order to claim the
deduction on their 2017 returns. In response, the IRS released a
notice warning taxpayers this maneuver would only be allowed if
they had their assessment for 2018.
“What was good advice one day suddenly was not actionable
the next day based on a new interpretation by the IRS,” says John
Chang, first VP of research services for Marcus & Millichap.
The commercial real estate community can expect a similar
scenario over the first and second quarters of this year. There are,
as several experts have told Real Estate Forum, many gray areas
in the bill around the provisions.
“There’s a lot in the bill that’s not necessarily black and
white,” according to Adrian Alfonso, a CPA and member of
Kaufman Rossin’s real estate team. His advice to commercial
real estate executives is to slow down and not rush into any
major decisions. Or, for that matter, follow general advice that
you read in the media. Instead, he says, consult a professional
with any questions.
Many of the decisions that need to be made can wait a few
months, Alfonso asserts. The check-the-box election, for exam-
ple, is not due until March. Also, it’s widely expected that the IRS
will be issuing guidance on issues that are presently unclear,
hopefully during the first quarter. “This is the largest change to
the tax law in 30-plus years,” Alfonso says. “It’s going to take time
for all of this to settle and guidance to be out.”
Following are some of the areas in the new tax law that experts
feel need further clarification before real estate executives can
make final decisions.
THE SECTION: 199A
What It Says: Taxpayers other than corporations will be
allowed a deduction of approximately 20% of their qualified
business income, explains Montgomery McCracken’s senior tax
law partner, Gary M. Edelson. This amount is going to be the
lesser of 20% of the qualified business income or the greater of
50% of W- 2 wages paid to employees and 25% of W- 2 wages plus
2.5% of unadjusted basis of qualified property.
What We Don’t Know About It: One basic question is what a
qualified business is. “Typically if you’re holding real estate, it
would be considered a qualified business,” says Lorraine White,
partner, tax services, for Grant Thornton. “However, if you look
at some of the other definitions of real estate that’s in the bill, it
talks about owning and managing real estate as a whole.”
It is a possible, therefore, that a management company—or a
developer or construction company—could be considered a
qualified business and would be able to avail itself of the deduc-
tion. “Quite frankly, that would be a very big deal,” White says.
Another uncertainty is how the 2.5% of adjusted basis is to be
computed. This provision was added toward the end of the nego-
tiations, according to Alfonso. The way he reads it, “it seems as if
they’re going to allow you to take 2.5% of the cost of the assets
used in the trade or business, not taking into account deprecia-
tion. So you’ll actually be able to get the gross value of the asset
right after the acquisition and take the calculation of that num-
ber either for a 10-year period, or the last day of the last full year
of applicable recovery period for that asset.”
But there still needs to be clarification as to what exactly is
allowed under the rule. For example, a property under develop-
ment may not necessarily qualify under this rule because techni-
cally that property is inventory, not depreciable property.
BY ERIKA MORPHY