Tax Bill a Boom to Commercial Real Estate Owners
December 17 2017 - 8:42PM
Dow Jones News
By Keiko Morris
The final Republican tax bill coming up for a vote this week
promises to hit some high-income New York area taxpayers hard. But
commercial real estate owners have reason to cheer.
The bill, which includes deep tax cuts for corporations, reduces
the tax rate and provides a steep deduction for some businesses
structured as partnerships, limited-liability companies and other
so-called pass-through companies, which is how most real estate
businesses are set up.
In fact, real estate businesses appeared to fare better than
other pass-through businesses, which pay taxes through individual
returns. Not only does the proposal drop the top individual
marginal tax rate, but the plan also gives a 20% deduction on
taxable income to pass-through businesses owned by individuals
making less than $157,500 and joint filers making less than
$315,000.
In addition, the bill gives some owners of pass-through
companies who exceed those income levels another method of
qualifying for that deduction that benefits private real estate
partnerships with few employees and large real estate holdings, tax
lawyers noted.
"If enacted, the commercial real-estate industry will have hit
the jackpot," said Steven M. Rosenthal, a senior fellow at the
Urban-Brookings Tax Policy Center, a joint venture of the Urban
Institute and the Brookings Institution.
The tax package's main goal is to provide incentives for
businesses to move away from the mentality of "preservation of
capital" to growth, said New York developer Steve Witkoff. "The
psychic value is that you finally have a government saying we are
creating incentives for you under the tax code to build more,
create more manufacturing facilities and create jobs."
Some developers worried that the tax bill's broader changes,
such as residents losing the ability to fully deduct state and
local taxes, could weigh on the region's economy. The final version
caps the deduction, which can run well into the tens of thousands
of dollars for high earners, at $10,000. The standard deduction,
used by people who don't itemize their tax returns, almost doubles
under the tax bill, however.
Higher federal tax bills for some workers likely will weigh on
companies' decisions of where to locate employees and their
inclination to put them in major central business districts such as
New York City, said Jonathan Mechanic, a partner at law firm Fried,
Frank, Harris, Shriver & Jacobson LLP.
"While I am not suggesting a mass exodus, this impacts how they
allocate people to major central business districts in gateway
cities," Mr. Mechanic said.
Francis Greenburger, chief executive of real-estate company Time
Equities Inc., fears that provisions increasing individual taxes in
high-tax states could prompt some wealthy residents to leave the
state, taking their businesses, jobs and tax revenues with them.
"I'd rather have a healthy economy than have a bad economy and pay
a lower tax," Mr. Greenburger said. "It's short-term thinking."
For commercial property owners, the final bill presents a bigger
victory than many expected.
In the previous Senate version of the bill, high-income partners
in private real estate partnerships were limited from taking
advantage of the pass-through deduction with a restriction based on
the wages the business paid. The final bill added another formula
that uses the acquisition of a depreciable property, such as an
office building, in calculating how much income qualifies for the
deduction, said Mr. Rosenthal. That helps property owners who don't
necessarily have many employees.
Commercial real estate owners also avoid limits on deductions
for interest expense that will be imposed on other businesses. And
the final tax bill preserves the "1031 exchange" provision for real
estate investors, allowing sellers of real estate to defer
capital-gains taxes by reinvesting the proceeds in some types of
properties.
Some developers were buoyed by the overall tax plan and, more
specifically, measures they say could spur growth for businesses
that lease commercial properties and higher wages to offset the
sting of higher individual taxes some would face.
The provision allowing for businesses to fully expense certain
investments immediately rather than deducting them over time could
make it easier for companies to consider expanding offices, said
Mr. Witkoff.
Write to Keiko Morris at Keiko.Morris@wsj.com
(END) Dow Jones Newswires
December 17, 2017 20:27 ET (01:27 GMT)
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