How the New Tax Reform Act Impacts Multifamily Investment
Written by Nick Holevas on April 19, 2019
When Congress enacted the Tax Cuts and Jobs Act in December 2017, it created some great opportunities, and some disadvantages for multifamily investors, mainly:

1. Flow-Through Entities. Since the multifamily industry is dominated by “flow-through” entities such as LLCs and partnerships, instead of publicly-held corporations, the company’s earnings are passed through to the partners who then pay taxes on their share of the earnings on their personal tax returns. By decreasing individual income tax rates and establishing the new 20 percent qualified business income deduction, both effective through 2025, tax reform will greatly benefit operators of multifamily apartment dwellings.

2. Deduction for Business Interest. Multifamily developers generally borrow an average of about 70% of the total cost for new construction. In many cases, curtailing the deduction for business interest expense would greatly increase the cost of debt financing for projects. This, in turn, will inhibit development activity and since the country is suffering from a shortage of apartment homes, enforcing the business interest limitation makes investing in multifamily a disadvantage. One way to curtail this is to use a longer period for depreciation, so consult your tax preparer as to the best course of action.

3. Depreciation Rules. The good news, or bad news, depending which way you look at it, is that depreciation for multifamily dwellings has been maintained at 27.5 years, but the business interest deduction has been capped, depending on the percentage of passive partners of the entity. Land improvements and non-real property assets may receive bonus depreciation of up to 100% of the cost, depending on the date the asset was placed in service, through 2022, and bonus depreciation through 2026. You may opt, however, for a period of 40 years for real property depreciation, if you wish to take advantage of the business interest deduction.

4. Like-Kind Exchanges. Like-kind exchanges, which enable property owners to defer capital gains taxes to a future date, have been limited to real property and not personal property. These personal property assets will not be able to be in a like-kind exchange, which have made cost segregation studies something to think about, as they will not be of benefit, in this case.

5. Carried Interest. Since one in ten apartment projects never break ground, there is considerable financial risk, when it comes to developing properties. Carried interest, which is currently taxed at long term capital gains rates, if held for more than 3 years, encourages many real estate entrepreneurs to be innovative in their methods for creating returns for their investors. There is legislation, however, currently going through Congress that would tax carried interest at ordinary rates. This would affect multifamily developments across the nation, if it passes.

6. Low-Income Housing Tax Credit (LIHTC). Since the corporate income tax decreased to 21%, that would have had many negative consequences on the LIHTC. Congress, as a way to offset the negative impact, has increased the LIHTC authority by 12.5% between 2018 and 2021. Low income housing is desperately needed across the country, so hopefully this increase will have a positive impact.

7. Estate Tax. This is good news for multifamily investors. By doubling the estate tax exclusion to $11.2 million ($22.4 million per couple), indexed for inflation, through 2025, many apartment investors, who are mainly family owned businesses, will get a great benefit. They will be able to keep the stepped up basis and the maximum 40% rate through 2025. 

Nick Holevas, CPA

Nick Holevas, CPA, helps multifamily real estate investors analyze deals and create awesome returns on investment for themselves and their partners, by taking over the back office, accounting, and tax headaches. If you want to get rid of these headaches and create awesome returns on investment, while maintaining your fiduciary duty to your investors and partners and staying compliant with federal and state taxing agencies, schedule your free consultation session today!
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