New tax bill's effect on the commercial real estate market

By Chris Rising

In December, Congress passed the most comprehensive change in the tax code since 1986. While we do not yet know for sure how those changes will affect commercial real estate, the general consensus here at Rising is that the overall impact will be positive. We may see corporations utilize the extra cash from their tax cuts for built-to-suit developments or new headquarters, or grow their employee base and expand their leased space. This means there could be slightly more demand from the tenant side in both the capital and leasing markets.

Let’s take a deeper look at some specifics from the new tax bill that directly relate to commercial real estate:

LLCs & Pass-Through Deductions

Because the new tax bill greatly decreases the tax rate for corporations (from 35% to just 21%), many members of Congress believed that business income earned by sole proprietors, such as independent contractors, as well as by pass-through businesses, such as partnerships, LLCs, and S corporations, should also receive tax rate reductions. Owners of pass-through entities are typically eligible to claim a 20% deduction for business-related income. Since real estate investments are almost always held in LLCs, the industry will receive similar benefits to other industries that are impacted by the corporate tax rate reduction. 

Like-Kind Exchanges

Since 1921, real estate owners have been able to defer capital gains tax via like-kind, or 1031 exchanges, by purchasing a different property with their sale proceeds within 180 days. Luckily, the new tax bill will continue to allow 1031 exchanges for real property.

Carried Interest

Much beloved by private equity, venture capital, hedge funds, and real estate operators alike, the carried interest provision allows certain incentive-based income earned by investment managers to be taxed at a lower long-term capital gains tax instead of being taxed as ordinary income. With the new tax bill, in order to continue to qualify for capital gains treatment of carried interest income, the asset producing the carried interest will have to be held for a minimum of three years (compared to one year in previous tax law). This is definitely a downgrade from previous tax law for real estate operators, but still better than eliminating the preferential treatment altogether. This will not affect most Rising investments because we usually underwrite hold periods of 3 to 7 years.  This is typical of most investors in real estate.  We expect this may slightly affect the hold periods of certain properties in order to reach the three-year goal. 


Generally, no changes were made to the current depreciation rules and timelines for real estate. However, if property owners opting to use the real estate exception to the interest limit must depreciate real property under slightly longer recovery periods of 40 years for a nonresidential property, 30 years for a residential rental property, and 20 years for qualified interior improvements. Land improvements such as parking lots, and drainage, and tangible, personal property used in a real property trade or business are eligible for 100% expensing for the next five years.

Historic Tax Credit

The conference agreement preserves the 20% tax credit for the rehabilitation of historically certified structures, but taxpayers must claim the credit ratably over a five-year period. The bill repeals the 10% credit for the rehabilitation of pre-1936 structures.

Net Interest Expense Deduction

Investment property owners can continue to deduct net interest expense, but investors must elect out of the new interest disallowance tax rules. 

Section 179 Expensing

Some commercial real estate, especially nonresidential, will benefit from the new law’s expanded coverage and scale of Section 179 of the IRS tax code, which covers certain kinds of depreciation deductions. The final bill increases the amount of qualified property eligible for immediate expensing from the current law’s $500,000 to $1 million. The phase-out limitations are increased from $2 million to $2.5 million. The final bill also expands the definition of qualified real property eligible for Section 179 expensing to include any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: roofs; heating, ventilation, and air conditioning property; fire protection and alarm systems; and security systems. Immediate write-off of certain improvements to commercial buildings may make returns to value-add projects slightly more appealing after tax considerations. Already the most popular strategy among private real estate investors, value-add strategies will likely get even more attention.

We’ll be watching these changes closely, but we don’t anticipate any major overhauls to commercial real state resulting from the new tax bill. We expect 2018 to be business as usual from a tax planning perspective.


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