Tax Reform FAQs

What is the status of EPAct 179D the deduction for energy efficient lights, HVAC, and Roofs for commercial buildings?
On February 9, 2018, it was extended to retroactively cover the 2017 filing period. It was a part of a package of 30+ extenders that were included in the Bipartisan Budget Act of 2018. The extension only covers the 2017 filing period. In 2018, Congress will again reevaluate whether to further extend the deduction.
Deduction Eligibility:
• Any Commercial Property or 4+ Story Multi-Family Property Newly Constructed prior to December 31, 2017 OR retrofits to Lighting, HVAC, or Envelope components resulting in reduced energy consumption
• Eligible New Properties Qualify for up to $1.80 per square foot, Eligible retrofits qualify for up to $0.60 for lighting, $0.60 for HVAC, $0.60 for Envelope

What is the status of 45L Energy Tax Credit for residential properties?
On February 9, 2018, it was extended to retroactively cover the 2017 filing period. It was a part of a package of 30+ extenders that were included in the Bipartisan Budget Act of 2018. The extension only covers the 2017 filing period. In 2018, Congress will again reevaluate whether to further extend the deduction.
Credit Eligibility
• Single-Family or Multi-Family Less than 3 Stories
• New Construction or Major Renovation
• $2,000 tax credit per unit

Will carried interest for the Sponsor/GP on investment real estate be considered Long-Term gains after one or three years under the new tax law?
Three Years

For the 20% Pass-Through Deduction, what is a pass-through entity? Would it include an individual private owner that owns an investment property under his/her
personal name, or does it require an LLC?
It would be an LLC or other partnership structure, not personal. The deduction is available to every taxpayer who is not a corporation. This can include entities taxed as partnerships, S corporations, trusts, and even sole proprietors.

Are there any changes to the tax laws that are particularly Negative for real estate investors?
The biggest change is the interest issued at certain thresholds that require ADS method to maintain full deductibility. The inability to deduct business interest may impact some real estate investors. If this limit applies, the taxpayer may have to use ADS depreciation (which is less favorable) and may not qualify for the new 100% bonus depreciation. This may put real estate investors on an unequal footing compared to other taxpayers. Corporations received a guaranteed flat 21% tax rate. Flow through and disregarded entities received the 20% pass-through deduction. Most real estate investors operate through these non-corporate entities and it isn’t altogether clear what benefit real estate investors will get from the 20% pass thru deduction. This may also put real estate investors on an unequal footing compared to other taxpayers. The 100% bonus depreciation provisions can provide a benefit to many taxpayers; however, for real estate investors, the bonus depreciation may only serve to reduce the 20% pass thru deduction. This may also put real estate investors on an unequal footing compared to other taxpayers.

Are there any property Types that are specifically negatively affected by the new tax laws?
Type would really have no influence. Investors may prefer investments that produce current year income over investments that produce capital gains to be realized in the future given that we are in a period of low Federal income taxes. We may see a shift in investments in income-producing properties. Property that includes significant amounts of Sec. 1245 personal property may also be less favored. Absent guidance, these properties may present challenges if a 1031 exchange is expected or probable in the future and until the government clarifies whether the property can qualify for 100% bonus depreciation as qualified improvement property.

How long until the Treasury Department and IRS come out with additional guidance? Will it come all at once or piecemeal?
The goal is February. Otherwise, people won’t see the impact in their checks – which is crucial. The IRS has announced that additional guidance will be out this summer.

What is the effective date on the new tax rules?
January 1, 2018, for most although bonus starts for September 2017

Are the accelerated depreciation provisions particularly favorable for net-leased investments?
To the extent, these are leasehold improvements

It was mentioned that acquisitions of new or used property can now qualify for bonus depreciation. Is this limited to $1,000,000 per property and $2.5 million in aggregate?
The $1m/$2.5m limitation applies to 179 expensing, not bonus depreciation. There are no dollar limitations for bonus. Section 1250 property is not explicitly excluded from bonus depreciation, but, generally speaking, bonus depreciation can only be used for property that has a recovery period of 20 years or less.

Also, the pass-through is complicated. There is a phase-out of the 20% pass through above $315,000 for married couples. If I make more than that, does this mean that I use the 2.5% of depreciable assets up to the 20% amount?
You are still eligible for the 20% pass-through deduction if your income is above $315,000. However, above $315,000 there are limitations placed on the size of the deduction. Below $315,000 there is no limitation. The limitation, if applicable, limits your deduction to the larger of: (50% of W-2 wages); OR (25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property). The limitation is phased in over $100,000 of income. So, if you make between $315,000 and $415,000, you would be subject only to a fraction of the limitation. That fraction is based on the extent to which your income exceeds $315,000. (Note: We are waiting on guidance on whether business activities can be grouped or aggregated or disaggregated.)

For purposes of the 20% Qualified Business Income (QBI) deduction on commercial investment properties, does ‘QBI’ refer to a property’s revenue or more to NOI, which of course includes expenses?
It is closer to NOI. Qualified business income means the net-net-number of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer. It does not include wages earned as an employee or certain investment income: short-term capital gain or loss; long-term capital gain or loss; dividend income; or interest income.

If a hotel gave TI money towards the buildout of leased space, would that qualify as a Qualified Lease Hold Improvements (QLHI) property?
There is no QLHI anymore. There is just QIP. We are waiting for a technical correction to ensure that QIP qualifies for bonus. It should also be noted that there is always an issue of who owns the TI and is eligible for depreciation.

Can auto dealerships benefit from bonus depreciation from cost segregation due to the rules on floor plan financing?
If any client that has floor plan is excluded, it forces them into Section 179 – $1,000,000 allowed, up to $2,500,000 in service. Fine for a single point dealership, but for a dealer owning multiple locations, they could quickly exceed the allowable amount.

With the elimination of allocated value to personal property from Sec. 1031, how is this impacting cost segregation value of real estate properties?
You can still do the cost segregation. The personal property, depending on how the Treasury defines that, will not qualify for exchange treatment.

Do the new Bonus rules exclude residential properties?
Yes. Neither Residential Rental Property nor Nonresidential Real Property are eligible for Bonus Depreciation. However, QIP that is part of this property may qualify.

With respect to the 2.5% pass-through deduction, how does one determine with the “unadjusted basis” is for property acquired via exchange(s)?
The rules do not answer this question. We suspect the regs or guidance will. A literal reading of the new law suggests that it would be the exchanged basis.

 

For more information email us at info@engineeredtaxservices.com

While the answers to the FAQs reflect our views at this time, the accuracy or completeness cannot be guaranteed.  We will update this content as further developments occur.