The commercial real estate (CRE) landscape may face significant shifts as proposals emerge for modifying key provisions of the 2017 Tax Cuts and Jobs Act (TCJA).
Understanding these potential changes is crucial for property owners, investors, and industry stakeholders.
- Manufacturing Tax Rates and Construction Costs >> A notable proposal aims to reduce the corporate tax rate for U.S. manufacturers from 21% to 15%. While this reduction could benefit certain CRE sectors, it comes with a trade-off. The accompanying proposal for higher tariffs could drive up construction and development costs, potentially straining new project financials and affecting development decisions.
- Impact on REITs and Pass-Through Entities >>One of the most significant proposed changes involves the qualified business income deduction (Section 199A). The potential repeal of this provision, which currently offers a 20% tax deduction on domestic business profits including REIT dividends, could substantially impact tax liabilities for commercial real estate owners. REITs and pass-through entities would face taxation at individual rates, representing a marked shift from current tax treatment.
- Changes to Property Investment Strategies >> Several proposed modifications could reshape how commercial real estate professionals approach investment and property management:
*Interest deduction calculations may shift to using EBITDA instead of EBIT, potentially allowing real estate firms to recapture deductions by incorporating property depreciation. This change could significantly affect financing strategies and cash flow projections.
*The future of bonus depreciation remains uncertain as the current 100% provision phases out by 2026. Proposals to reinstate this benefit could influence decisions about investments in land improvements, furniture, and qualified improvement property. - SALT Deduction Considerations >> The expiration of the $10,000 cap on state and local tax (SALT) deductions presents another area of potential change. A proposal to eliminate this cap could particularly benefit investors operating in high-tax states. Without elimination, many CRE professionals may need to rely on pass-through entity-level tax strategies to mitigate the impact.
Strategic Planning for the Future
- Tax policy has risen significantly in importance for the CRE industry, jumping from eleventh to fifth place in industry outlook rankings. This elevation reflects growing recognition of tax policy’s potential impact on investment returns and operational strategies.
- Commercial real estate stakeholders should prepare for these potential changes by reviewing their current tax strategies and considering how different scenarios might affect their portfolios. While some proposed changes may create new opportunities, others could require significant adjustments to existing business models and investment approaches.
- Understanding and adapting to these potential tax modifications will be crucial for maintaining competitive advantages in the commercial real estate market. Industry professionals should work closely with tax advisors to develop flexible strategies that can accommodate various possible outcomes.
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