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Navigating Recent Tax Law Changes in Commercial Real Estate: A Guide for Investors

The commercial real estate landscape is continually evolving, with tax laws playing a pivotal role in shaping investment strategies and financial planning. Staying informed about recent changes in tax legislation is crucial for real estate professionals, investors, and business owners. Here’s an in-depth look at some of the latest tax laws affecting commercial real estate and their implications.

Changes in Depreciation Rules

Section 179 Deduction Dollar Limits

For tax years beginning in 2024, the maximum Section 179 expense deduction is set at $1,220,000. This limit is subject to a phase-out, reducing dollar-for-dollar the amount by which the cost of Section 179 property placed in service during the tax year exceeds $3,050,000.

Phase-Down of Special Depreciation Allowance

The special depreciation allowance is scheduled to phase down to 60% for certain qualified property acquired after September 27, 2017, and placed in service after December 31, 2023, but before January 1, 2025.

Opportunity Zones

The Opportunity Zone program, created under the TCJA, continues to offer substantial tax benefits for investors. Opportunity Zones are designated economically distressed areas where investments can receive preferential tax treatment. Capital gains reinvested in these zones through Qualified Opportunity Funds (QOFs) can defer taxes until 2026, with potential reductions based on the holding period. Investments held for ten years or more can benefit from permanently excluding gains from the Opportunity Zone investment.

This initiative encourages development and revitalization in underserved communities while providing significant tax advantages to investors willing to commit to long-term projects.

1031 Like-Kind Exchanges

Section 1031 like-kind exchanges remain vital for deferring capital gains taxes on commercial property sales. Recent legislative discussions have included proposals to limit or eliminate 1031 exchanges, but the provision remains intact. This allows investors to defer taxes by reinvesting proceeds from the sale of a property into a similar property, promoting continued investment in commercial real estate.

Investors must stay vigilant about changes to this provision, as any alterations could impact their investment strategies and tax planning.

Interest Deductibility

Typically, taxpayers can deduct interest expenses paid or accrued within a taxable year. However, the Section 163(j) limitation may restrict the amount of deductible business interest expense in a taxable year.

Limitation Calculation

The deductible business interest expense cannot exceed the sum of:

  1. The taxpayer’s business interest income for the taxable year.
  2. 30% of the taxpayer’s adjusted taxable income (ATI) for the taxable year.
  3. The taxpayer’s floor plan financing interest expense for the taxable year.

Temporary Adjustment Under the CARES Act

The CARES Act introduced a temporary adjustment, allowing a different percentage (50%) of ATI to apply for taxable years beginning in 2019 and 2020. For details on ATI elections and special partnership rules, refer to the CARES Act and Revenue Procedure 2020-22PDF.

State and Local Tax (SALT) Deductions

The TCJA capped the State and Local Tax (SALT) deduction at $10,000, impacting commercial real estate owners in high-tax states. This cap has increased the overall tax burden for many property owners, making strategic tax planning more critical. Some states have introduced workarounds, such as pass-through entity taxes, to mitigate the impact of the SALT cap.

Implications for Commercial Real Estate

The recent tax law changes present opportunities and challenges for the commercial real estate sector. Accelerated depreciation and the Opportunity Zone program offer avenues for tax savings and investment incentives. However, limitations on interest deductibility and the SALT cap require careful planning to optimize tax outcomes.

Staying abreast of these changes and consulting with tax professionals can help real estate investors and businesses navigate the complexities of the current tax environment. By leveraging available tax benefits and planning strategically, stakeholders can enhance their financial positions and drive commercial real estate market growth.

Stay Informed and Proactive

Navigating the intricate web of tax laws in commercial real estate demands constant vigilance and proactive planning. As these laws evolve, staying informed and consulting with tax advisors can ensure you capitalize on available benefits while mitigating potential risks. Keep an eye on legislative developments to adapt your strategies and maximize the advantages in this dynamic landscape.

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