Real Estate Investors – There is a silver lining in this crisis. Although the focus of the legislation in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is not tax related, a large number of tax provisions are included. Here is an overview of how some of the tax provisions recently enacted may affect real estate owners.
- Do you have major business losses in 2018, 2019 or 2020? If so, you may remember the sting when you learned that the Tax Cuts and Jobs Act of 2017 (TCJA) limited your losses to $250,000 for single people ($500,000 for married filing jointly). Good news – the CARES Act temporarily suspends the Net Business Loss Limitation.
- Have any excess lingering Net Operating Losses? Annoyed you could not use them to offset previous years’ operating gains or future years’ gains in excess of 80% of taxable income since the limitation enacted with the TCJA in 2017? Poof – limitation and carryback disallowance gone. Carry back NOL generated 2018 and later to offset excess gains for 5 years and fully offset taxable income in 2019 and 2020.
- Have you invested heavily in Sec. 168 Qualified Investment Property (or QIP, i.e. leasehold and other interior improvements to a nonresidential building after being placed in service)? You could save big time if you have or plan to. The TCJA contained a drafting error that was fixed by the CARES Act. The omission was twofold: First, QIP had to be depreciated over 39 years, and second, QIP did not qualify for immediate expensing or bonus depreciation because of the TJCA’s limit to classes of assets with lives shorter than 20 years. The CARES Act fixes this by changing the depreciable life of QIP to 15 years with changes retroactive to January of 2018 thereby making many improvements potentially 100% deductible and worth your while to review.
- Increased cap on Business Interest Deduction – For 2019 and 2020, Sec. 168 is amended to allow 50% of a taxpayer’s adjusted taxable income to be deducted (up from 30%) and gives taxpayers the election of 2019 instead of 2020 EBIT for the computation.
At the end of the day, one thing is for sure: the need to consider the implications of these changes not only for this tax year but also for previous tax years. A strategic review of fixed assets, operating losses and deductions over the last few years could greatly benefit your strategy and position for 2020 and going forward.
April 9th, 2020