Getting Real About Commercial Real Estate Tax Laws
Major Provisions Affecting Commercial Real Estate (Part 2 of the Saga)
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The new tax law affects everybody in different ways, but if you own real estate, this article is going to help you figure out what you need to consider. If you missed Part 1 of the tax law explanation, I would suggest taking a look--especially if you’re also a homeowner!
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These are a few of the worries that come with owning commercial real estate:
- Like-Kind Exchanges
- Carried Interest
- Cost Recovery (Depreciation)
- Qualified Private Activity Bonds
- Low Income Housing Credit
- Rehabilitation Credit
Also known as Section 1031, “Like Kind” refers to two properties or assets that are of the same type or for the same use. For example, two commercial buildings or two residential homes. The new bill keeps the laws it already had for how to exchange real estate properties, but you are no longer allowed to exchange personal assets such as fast-food franchises, certain vehicles, artwork (yeah, those count!), and others.
In case you’ve forgotten, let us remind you that capital gains are the money that you acquire from selling your properties for more than what you bought them. The new law requires that you have an asset for at least 3-years to qualify for carried interest instead of just one.
Cost Recovery (Depreciation)
Cost Recovery refers to the deductible you get from owning any asset prone to wear-and-tear. The time it takes for properties to qualify as “depreciated” is the same:
- Nonresidential Real Estate: 39 years
- Residential Rental Property: 27.5 years
- Qualified Improvements: 15 years
FYI, they now call a Restaurant, Leasehold, and Retail Improvement all the same thing: “Qualified Improvement Property.”
Qualified Private Activity Bonds
In case you were wondering, private activity bonds and qualified private activity bonds are different. There’s a reason that qualified private activity bonds are also called “tax-exempt private activity bonds.” Certain activities that qualify are listed in Publication 4078, such as building highways, disposal facilities, and airports. In short, yes, you should still be considering qualified private activity bonds for your projects.
Low Income Housing Tax Credit
If you own a low-income rental building, you may qualify for this tax credit. Keep in mind that it spans over 10 years. Be sure to get the paperwork sorted out properly.
Rehabilitation Credit (Historic Tax Credit)
Rehabilitation Credit is for repairs and renovations on old buildings. You used to be able to get 10% credit on-80-year-old buildings (pre-1936), but now only certified historic structures count. If you happen to be in charge of a certified historic structure, you get 20% credit split up over a 5-year period instead of all at once.
And that’s not all! If you happen to also be a real estate professional, there is a whole other explanation coming your way. For the rest of you, feel free to research further with HER and reconsult these articles along the way if you need.