The bill has been signed into law – what that means for the commercial real estate industry, and what changes to expect in the immediate future.
For the first time in over three decades, Congress has passed major legislation impacting the US Tax Code.
Earlier this week, the House of Representatives took its second vote and passed the new tax reform package after Senate rules necessitated some minor modifications to comply with the “reconciliation” process, which was utilized to allow for a simple majority vote to pass the bill.
As expected, the vote was split entirely along party lines. The President signed the bill into law on Friday morning of December 22nd.
That will have CFO’s and their staffs around the country working some serious overtime during the holidays, as federal regulations require the financial impact of new laws to be disclosed in the quarter in which they are enacted. Mr. Trump could have waited to sign the bill until January to avoid the rush, but was determined to deliver his promised Christmas gift to the country.
What the Changes Mean for Us
The new law appears to be good news for the commercial real estate industry.
The deductibility of mortgage interest and property taxes for commercial property was preserved, along with the IRC 1031 exchange rules for real property. While the exact rules have not been written, the law also contains provisions to accelerate the expensing of tenant improvements, which would be great news for landlords and tenants who have to spend money to retrofit existing facilities.
That comes in addition to much more generous expensing rules for the purchase of capital equipment, which could significantly mitigate the cost of expansion and stimulate more lease and sale activity.
For many of those businesses operating as pass-through entities, the new law will substantially reduce the tax on annual distributions.
The first 20% of qualified income will be deductible with the balance taxed at new individual marginal tax rates that top out at 37% vs 39.6% under current law.
It is important to note that some businesses, including law firms, doctors, accountants and other service-based industries will not receive the same benefits of the new provisions. Changes to the categorization of wage vs non-wage income are also in the bill, but until all the rules that go with the legislation are written, we can’t be sure. More to follow on that one.
We highly recommend that you connect with your tax professional to get the details on how the new law will affect you specifically. It may be in your interest to pre-pay 2017’s state income tax and the entire property tax bill for the current fiscal year on your personal residence before the new law’s limitations on those items kick in.
We will do our best to keep your current on new developments, but recommend that your accountant be on speed dial for a while. The devil is always in the details and there are lots of new rules to be written and understood.
But, for the moment, enjoy your holiday season knowing that there’s a pretty good chance your tax bill is going to be a little lighter next year.