Tax Cuts and Jobs Act: Highlights for the Real Estate Industry
January 8, 2017 | Lexology
On December 22, 2017, H. R. 1, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act significantly revises many aspects of U.S. federal income tax law applicable to businesses conducted in corporate and partnership form, and will also affect the U.S. federal income tax treatment of many individuals. Notably, the Act will significantly impact real estate investors, sponsors and developers, and there are a number of special provisions applicable to REITs and REIT investors. Below is a brief summary of some of the Act’s provisions that are expected to have the greatest effect on the real estate industry. For a more detailed summary of the Act’s provisions, see our memorandum entitled “A Look at the New Tax Law and How It Impacts Your Business and Investments” (the “Tax Memorandum”). It should be noted, however, that the full impact of these far reaching provisions will, in many cases, only be known as implementing rules and market practices develop.
- Individuals may deduct up to 20% of any “qualified REIT dividends” received in a taxable year, as discussed in the section entitled “Deduction for Qualified Business Income of Individuals, Trusts and Estates” in the Tax Memorandum. Qualified REIT dividends include any dividends received from a REIT other than dividends designated as capital gain dividends or dividends that would otherwise qualify for capital gains rates. Generally speaking, the net effect of this deduction is that qualified REIT dividends will be taxed at a rate that is 80% of the rate that would otherwise apply to those dividends. Thus, for taxpayers in the 37% bracket, the rate on those dividends would be 29.6%.
- Under the Act, individuals may also deduct as much as 20% of “qualified business income” that is allocable to a qualifying real estate trade or business. Again, for taxpayers in the 37% bracket, this deduction would reduce the rate to as low as 29.6%. This deduction does not apply to capital gains, which generally continue to be taxed at a 20% rate.