What hoteliers need to know about proposed tax-reform legislation

Tax reform legislation is making its way through Congress and could be signed into law by the president before the year’s end. These new tax laws could hold subtle changes for commercial real estate, according to a special report from Marcus & Millichap.

“For real estate investors, the final versions appear relatively benign, with only modest changes to key provisions such as the 1031 tax-deferred exchange, mortgage interest deductibility and asset depreciation,” according to the report, prepared by John Chang, first VP of research services at the firm.

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Some highlights the report calls out include:

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  • 1031 Exchange: The tax-deferred exchange will remain unchanged for real estate in both the House and Senate versions.
  • Interest deduction for businesses: In the House version, interest deduction on real estate remains unchanged for businesses, while the Senate’s version allows for full deduction but extends depreciation timelines if the deduction is used.
  • Depreciation: The House’s version maintains the 27.5-year depreciation term, while the Senate’s version increases the term to 30 years if interest deductibility is used. However, it offers a 25-year depreciation period if no interest deduction is used.
  • Carried interest: In both versions, asset hold times are increased from one year to three years and earnings are treated as capital gains.
  • Pass-through income: The House’s version can reduce tax rates on pass-through income from personal rates of 39.6 percent to as low as 25 percent dependent on whether the earnings are active or passive. The Senate’s version allows a 23-percent deduction on qualified pass-through income with some restrictions.
  • Corporate tax rate: The maximum tax rate is reduced from 35 percent to 20 percent in both versions.
  • Estate tax: In both versions, the exclusion is doubled to $11 million for single filers and $22 million for married couples filing jointly. In the House version, the tax is repealed by 2025.

“For the commercial real estate sector, one of the greatest benefits of the new tax law could simply be its finalization, as this will reduce uncertainty,” the report reads. “With new tax rules in place, some of the caution that emerged over the last year could abate, reinvigorating investors who moved to the sidelines over the last year.

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“The new tax laws could also inspire investors to reevaluate how they structure their real estate holdings, particularly private investors who hold their properties personally rather than through a pass-through entity. There may be sufficient tax benefits for these investors to reposition their portfolios into an LLC, sparking some investment decision that had been put on hold.”