could take advantage of the full expensing in the fourth quarter
of 2017 even if it takes advantage of the election to opt out of the
interest expense limitation for tax year 2018, White says. “There
may be a bit of a loophole.”
A DEEPER DIVE: INTEREST DEDUCTIONS
Under Section 163(j), interest deduction will be limited to 30% of
adjusted taxable income—with the exception of electing real property
trade or business. One ramification, according to Montgomery
McCracken’s senior tax law partner, Gary M. Edelson, is that real estate
limited partnerships and LLCs might use preferred-membership interests or preferred LLC interests with a high yield in lieu of debt financing.
As Edelson explains, the new law puts a limitation on the amount of
interest that can be deducted, with the excess carried forward.
Business entities that use a significant amount of debt are going to have
to work around this or face the cap. One way would be to use limited
partnerships or LLCs where lenders invest in the transaction, rather
than simply lending money. It would be structured so the capital providers receive a special allocation of income, probably based on a preferred return—such as a given amount multiplied by the amount
invested. Put simply, the LLC interest would look a bit like debt, but it
technically would not be considered as such because the lender
wouldn’t have creditor’s rights.
Edelson doesn’t think that banks will have an appetite for being LPs.
What’s more likely is that a non-bank entity that provides money may
decide that there’s little difference between being an LP or holding an LLC
interest versus being a lender holding a debt instrument.
THE SECTION: 179
What It Says: The immediate expensing of personal property
was enhanced to include used property purchased from an
unrelated person where the basis is a cost basis, Edelson
explains. Qualified improvement property will be permitted to
be depreciated over 15 years. This is any improvement to the
interior portion of a nonresidential building if the improve-
ment is placed in service after the date the building delivered.
Section 179 expensing is permitted for similar activities as well
as new roofs, heating and ventilation and air conditioning sys-
tems, fire protection or alarm and security systems.
What Might Happen: “The fact that they are allowing you a
100% depreciation on any assets in 15 years will lead to a lot of
people using cost segregations to maximize those deductions,”
Alfonso says. A cost segregation, usually conducted by an engi-
neer, looks at the different structures, such as the air-condi-
tioning/heating unit and plumbing for instance, and then
breaks down the building into different buckets, Alfonso
explains, with some of the buckets having more favorable
depreciation years. “So you’ll be able to expense them a lot
quicker especially now that bonus depreciation, which was
historically 50%, is now 100% on new and used assets. That
gives the taxpayer the ability to expense a good chunk of what
they’re purchasing right off the bat.”
What We Don’t Know About It: There are some nuances
between the rules for mortgage interest deductibility and their
relationship to depreciation timelines, says Marcus &
Millichap’s Chang. “So, an investor can write off the mortgage
interest on a commercial real estate investment, but if they do
32 REAL ESTATE FORUM JANUARY/FEBRUARY 2018