Real Estate Investing
Strategies to Navigate New Tax Laws & Real Estate
By Karen Evans
When the new tax plan was announced this past December, many of my fellow real estate professionals had concerns about how it would affect our real estate businesses. Most feared that the reduced home mortgage interest deduction that homeowners could claim, now limited to interest on up to $750,000 of indebtedness, would limit sales of homes in the multimillions of dollars.
Information about the effects of the new tax laws is becoming more evident, but there is still a bit of a learning curve for most of us. I decided to research these matters.
Benefits of Florida Residential Property Investment
Residents in the Northeastern states of New York, New Jersey, Connecticut, Washington, D.C. and Maryland, where some of the highest state income tax rates in the country can be found, were already enamored with life in South Florida as a part-time escape during the winter months. We affectionately call these folks “snow birds” or “snow flakes,” depending on whether they stay here for about four consecutive months or fly back and forth, North to South, during the winter months.
One look at the new tax law’s negative impact on certain of these northern states and it is easy to see why the “snow birds” are flocking down to South Florida in search of permanent homes that they can make their primary residences. In particular, the new limitations on deductions for state income tax add to making Florida a very desirable place to live – because, of course, there is no state income tax here.
As a matter of interest, Alaska, Nevada, South Dakota, Texas, Washington and Wyoming also have no state income tax. But Florida still remains more economically attractive. The Florida Constitution affords Florida homestead residents exemptions on property taxes, and advantages, such as portability of their homestead exemption and reductions from this transfer. There are other protections, as well. One example is the protection against having their homestead seized by certain creditors. Given all the benefits we have, it just makes sense to live here in Florida.
About now, if you don’t already live in Florida, you may be thinking, “Does this mean to save money on my taxes, I can relocate to a state where I may enjoy year-round sunshine, fabulous restaurants, unlimited shopping, boating, fishing and other water sports, and the ability to play daily golf and tennis, even in the winter months? Hmmm, well okay, sign me up.”
If you wish to make Florida your primary residence to reap the rewards mentioned previously, consider consulting with a Florida attorney to properly establish Florida residency and terminate residency in your prior jurisdiction.
It May Pay to Go Commercial
Things get even more interesting if you have funds to invest in commercial real estate. I am happy to say that business in the commercial real estate sector is increasing over last year here in the Sunshine State. Several peers and I have witnessed this first-hand. For further explanations on commercial real estate tax benefits, I met with a board-certified tax-law expert Mitchell W. Goldberg, a partner at Berger Singerman LLP in Boca Raton.
“The new tax law makes available a completely new non-cash deduction to certain owners of commercial real estate (as well as residential rental real estate) that has never been available before. Specifically, investors who own commercial real estate either outright in their individual names or through pass-through entities, such as limited liability companies, partnerships, and S corporations can deduct up to an additional 20 percent of their “qualified business income.” Very generally speaking, qualified business income includes taxable income from rental real estate activity. The deduction is a non-cash deduction meaning, much like depreciation, you don’t have to actually expend any funds to claim the deduction; it is automatic if you qualify for it. There are, however, certain limitations on the ability to claim and the amount of the qualified business income deduction. In addition, the new tax laws now permit 100 percent expensing of certain assets used in connection with the commercial real estate, as opposed to capitalizing and depreciating such assets over time”.
Given this information, is it any wonder why the commercial real estate business has had a big “uptick” this year vs. years past? I sell commercial real estate and work more in the “off-market” sector to locate investment properties that are not being directly or publicly marketed. Almost weekly, I receive calls from commercial brokers in other states with billions in investment funds to spend on the right commercial properties located in Florida. There is literally more money out there to spend than there are properties to acquire! If you own commercial real estate and were thinking of selling or are looking to get into the commercial real estate business, now is the time.
Know Your REITS
The lines forming to set up REITs (Real Estate Investment Trusts) are longer than the most popular rides at Disney. REITs have been around for years, but now they are receiving a new birth in a sort of “Baby Boom” for real estate.
According to Investopedia, REITs operate in a manner comparable to mutual funds, as they allow for individual investors to acquire ownership in commercial real estate portfolios that receive income from properties such as apartment complexes, hospitals, office buildings, warehouses, hotels and shopping malls. Private Equity and high-net worth individuals are reading and listening to their advisors as this new way to make money and save on taxes is becoming the latest wave.
To see whether and to what extent you can qualify for these new tax benefits, a tax professional should be your first call. Then contact an experienced commercial real estate broker to locate qualifying properties, and consult with a real estate attorney to guide you through the purchase and sale process. You may very well be on your way to taking advantage of the new tax benefits.