Tax experts say the law bestows several benefits that make it more appealing for HNW investors to buy properties.
For high-net-worth (HNW) investors in commercial real estate, the federal tax overhaul is practically a financial home run. Legal and tax experts say the law bestows several benefits that make it more appealing for HNW investors to buy properties.
Broadly speaking, the law, enacted in December, represents a huge win for HNW real estate investors, says Jamie Byington, a partner in the Coral Gables, Fla. office of financial and management advisory firm Cherry Bekaert LLP.
“It’s a great time to be in real estate from a tax standpoint. There is a definite leaning toward favoring real estate investments,” Byington says.
One of the pro-HNW wrinkles in the new tax law is the 20 percent deduction for qualifiednet business income stemming from pass-through entities. Subject to some complicated limitations, this applies to owners of real estate via partnerships or LLCs and investors in both public and private real estate funds, says Steven “Sonny” Ginsberg, co-founder of Chicago-based law firm Ginsberg Jacobs LLC.
Under the new law, HNW individuals will want to try to make real estate investments that are fully, or at least partially, eligible for the 20 percent deduction, says Allen Walburn, a real estate tax attorney at Los Angeles-based law firm Allen Matkins LLP. The deduction expires in December 2025.
Abe Schlisselfeld, a partner at New York-based accounting firm Marks Paneth LLP, adds that the law enables a taxpayer to factor 2.5 percent of the original purchase price of a property into the calculation of the 20 percent deduction for pass-through income.
This last-minute addition to the legislation will yield “significant savings” for commercial real estate investors, Schlisselfeld says. Potentially, an HNW investor could reduce real estate investments to an effective 29.6 percent tax rate, which is 10 points lower than it was in 2017, he notes.