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It has now been three months since the entry into force of TCJA: the tax reform providing drastic cuts all over the United States.
As already largely covered in our previous US Tax Reform article, this is the most radical change in the US fiscal legislation of the last 30 years and will impact many aspects of the US economy.
One of the most exposed markets is certainly real estate: an important indicator of a country’s economic performance.
As a consulting firm specializing in accounting and consulting services, we recently spoke at the Miami Italy-America Chamber of Commerce, about the effects of the reform on the US real estate market, with a special focus on the State of Florida.
Here are the main points covered by President Giulia Iacobelli, aimed at shedding some light on the main outcomes of the tax reform on real estate investments.
Mortgage interest deduction
The average mortgage is closer to $200,000, so the majority of the country won’t be impacted.
In theory, Miami’s luxury homebuyers would be most influenced by these provisions, but experts think they will likely see benefits from other provisions in the tax bill, for this reason, the impact isn’t likely to slow demand.
Deductions for income, sales, property taxes
Previously unlimited, now they are capped at $10,000.
Florida, specifically, has no state income tax and most property taxpayers in Miami will be able to deduct the full tax amount on their federal taxes.
This will probably lead to a scenario where more residents of other states owning high property values (and with state income tax) will decide to move to Florida. It will also compensate the expected slowdown in new sales of homes priced within the $750,000 to $1 million range, whose interest can no longer be deducted.
The “pass-through deduction”
Most of the commercial real estate is owned by entities such as partnerships or limited liability companies, which do not pay a direct corporate tax, they “pass-through” their gains and losses to the individual members of the partnership or LLC.
With the new law, investors in pass-through entities will benefit from a new 20% deduction (valid until 2025), lowering income tax rate substantially.
When the full deduction is applicable, it reduces the top effective tax rate to 29.6%.
In case of taxpayers with incomes above certain thresholds:
– the 20% deduction is limited to the greater of 50% of the W-2 wages paid by the business
– 25% of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis, immediately after acquisition, of depreciable property (structures, not land).
The 20% pass-through deduction begins to phase-out beginning at $315,000 (for married couples who file jointly).
This new deduction is very positive for investors and landlords since they often do business via pass-through entities (which are very important for asset protection): it will help limit their exposure in case of a lawsuit.
Additional tangible consequences will be:
– Real estate developers will probably increase the building of rental properties rather than single-family homes.
– Since commercial real estate investments will be eligible for the pass-through income tax deductions, more offices for lease will be built too.
The advantages of the 1031 Exchange happens when two different properties of the same value are exchanged, thus deferring capital gains taxes.
The investment value grows considerably if this operation is done several times over a long period. Instead of paying taxes on each sale, the same amount of money is invested in a replacement property each time.
With the new tax reform, owners will continue to defer their capital gains taxes using 1031 exchange, but, from 2018 it will only apply to real estate property (land and buildings). 1031 exchanges of personal property, rental cars, collectibles, aircraft, franchise rights, trucks, machinery, etc. will no longer be allowed.
Capital gain tax rates
Capital gain tax rates have not been changed. An investment property owner selling a property can potentially have four different taxes:
-depreciation recapture at a rate of 25%
-federal capital gain taxed at either 20% or 15% (depending on taxable income)
-3.8% net investment income tax (NIIT) when applicable
-the applicable state tax rate
Investors will have to hold these assets for three years (previously: one year) to qualify for lower capital gains tax rate on “carried interest” and need to evaluate the different net interest expense deduction options.
The new tax regulation continues the current depreciation rules for real estate. But, depending on the case, real property depreciation might undergo longer recovery periods, negatively impacting the return on investment:
– 40 years (nonresidential property)
– 30 years (residential rental property)
– 20 years (qualified interior improvements).
Florida unique tax issue
In the November elections, Florida residents will decide the fate of a constitutional amendment that, from 2019, will limit how fast a home’s assessed value can rise from year to year.
Florida voters will decide to rescind the rule or make it permanent.
The amendment would:
– allow for an additional $25,000 homestead exemption for properties valued at more than $100,000
– make permanent a 10 percent cap on annual increases in assessment for non-homestead properties
The Florida Association of Realtors says the amendment would prevent property taxes from increasing in areas where property values have soared. The association has also launched an ad campaign championing the amendment.
– The new tax law would allow significant savings for people willing to move to Florida (tax-free income).
– The US population is aging, and Florida has both a very favorable climate and many possibilities for those who can afford a comfortable life.
– Florida already favors foreign capital and investors with a remarkable reduction in corporate tax.
– Companies will be able to budget many acquisitions for the next five years thus increasing the purchase of offices and shopping centers.
– The tax rate on dividends from real estate investments will be limited to 25%; this could help the positioning and the inflow of capital for REITs.
Surely very specific skills are needed to deal with the jungle of the current and future fiscal changes.
Contact our firm immediately for all the administrative, fiscal and legal support you need!
Taken from: https://miamiagentmagazine.com/2018/01/08/top-issues-watch-2018-miami-real-estate/2/