Investing in real estate is not an easy investment. The commercial world touts the mantra, “Location, Location, Location!” but the ins and outs of the money involve factors that go far beyond the piece, and price, of property. Economic swings in foreign countries can affect sales, reducing jobs, closing offices, and you can end up with a vacant building at the end of the year and nothing to show for it, but plenty of taxes to pay for it. It is a challenge created for someone with courage, financial savvy, and it doesn’t hurt to have deep pockets.
If there is one thing that liberals and conservatives can all agree on, it is that tax laws are complicated. In fact, it might even be true that all parties would appreciate a simplification of tax laws. The disagreements tend to occur on exactly how those laws should be changed, often bringing us to a stalemate or place of minor changes back and forth. The end result is that little has changed in tax laws, particularly in commercial property taxes, in almost three decades. Until now…
New Tax Laws
New tax cuts are having affects all over our nation, across a variety of financial sectors, and it is still too early to know exactly how this will all turn out. However, there appears to be a certain demographic that is favored by property tax laws at this time. This demographic would include millionaires and billionaires, but it reaches down to those making six-figure incomes as well. While that may appear prejudiced against blue collar workers, it is important to consider the kind of financial resources it requires to enter into the commercial property business. It is not an easy investment, and depending on the job market and general economy, you could stand to lose as much as you gain. These rewards appear to be aimed at those willing and able to take the risk.
Real Estate Investment Trusts (REITs) are most affected by the Tax Cut and Jobs Act. Investors should have a reduced burden on their taxable income from the maximum 39.6% to 29.6%. Additionally, REIT investors can claim a 20% deduction on taxes generated by their dividends. This applies to both individuals as well as groups formed to purchase real estate. What does this look like? An $100,000 investment could reasonably bring about a 5% or $5,000 dividends at the end of the year. Under former tax laws, you would pay almost 40% of that back in taxes (about $2,000). Under the new law, you can deduct 20%, meaning you would only be taxed on $4,000, and with the reduced tax rate of about 30%, you would be looking at about $1300 owed in taxes, saving you $700. For smaller investors, that does not seem like a lot. For larger investors, it begins to add up quickly.
Limits on Tax Decrease Eligibility
This is clearly a tax break for the wealthy. The stipulation is that it only applies to those who make at least $300,000 as a married couple or at least $150,000 as an individual per year. However, when you consider the resources required to invest in commercial real estate, this limit is pretty generous. No one goes into commercial real estate on a $50,000/year salary. Those tax break percentages are meaningful at all levels, but until you are up in the multimillion dollar investment bracket, you will not see any earthshaking savings. Real estate is still going to be a challenge for those who do not have a lot of liquid assets to use to make it work.
Property Taxes Can Be Complicated
Whether you are new to REITs or you have been working with commercial real estate for quite a while, you need to know that the tax laws are changing in ways they have not been changed in a long time. It is wise to seek out counsel from those in the know, and Landwin Commercial Real Estate is here to help you get the information you need in purchasing or selling commercial real estate, how to make those decisions, and what kind of taxes you can expect in the months ahead.