The tax bill making its way through Congress includes several promising elements for commercial real estate investors, according to Marcus & Millichap Chief Intelligence and Analytics Officer John Chang in a research video. Although the language of the bill could change before it is finalized, he attributes the provisions relating to CRE to have a good probability of making it through the reconciliation process.
Broadly speaking, the proposal refreshes the 2017 Tax Cuts and Jobs Act with a few additions. Notably, the current version of the bill does not make any changes to 1031 tax-deferred exchanges or to carried interest, which is good news for investors, commercial real estate syndicators and equity funds.
“That's something I was concerned about because almost every time Congress makes changes to the tax rules, those two provisions come under fire,” said Chang.
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One element of interest to the CRE industry is the proposed increase of the qualified business income (QBI) deduction from 20% to 30%. In addition, the bill would re-establish opportunity zones for taxable years 2027 through 2033 with similar but modified benefits in temporary deferral of capital gains taxes, basis step-up and exclusion of taxable income on new gains, said Chang.
The bill also renews bonus depreciation for qualified property, extending the bonus first-year depreciation deduction under Section 168(k) through 2029.
“Under the bill, taxpayers can claim 100% bonus depreciation on qualified property acquired and placed in service after January 19, 2025, and before January 1, 2030,” said Chang. “The Section 179 bonus depreciation cap would be raised to $2.5 million, allowing businesses to expense 100% of the cost of qualifying equipment and software.”
If these incentives do indeed make it to the final package, it will be a significant win for CRE investors, Chang said.
“It will reinforce the value of doing a cost segregation study on properties, and value-add investments where the property is upgraded may generate higher after-tax returns over the short term,” said Chang. “Having 100% bonus depreciation could bolster the first-year returns on newly acquired properties, and it will be particularly helpful for investors when you factor in the higher interest rate climate.”
Meanwhile, Chang noted the bill likely will increase the federal deficit over the next 10 years, necessitating the issuance of additional treasuries, which poses a risk of higher interest rates. But still, it's important to note that there is no guarantee this bill will pass in its entirety, as we await the final language, as some Republican members in the Senate, including Ron Johnson, have spoken out against blowing up the debt and deficit.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
