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Impacts of the Tax Cuts and Jobs Act of 2017 on Real Estate Ownership and Investment

Brandon Orlando Theus


  • Congress permanently lowered the corporate tax rate under the Tax Cuts and Jobs Act of 2017 (TCJA).
  • Additional provisions affecting the industry include qualified business income deductions, like-kind exchanges, depreciation, business interest expenses, net operating losses, and excessive business losses.
  • The legislation affected the real estate market, homeownership, and state and local taxes for individuals and pass-through entities.
  • With so many changes, discussions and planning on structuring asset ownership or drafting joint venture documents to ensure long-term success are critical.
Impacts of the Tax Cuts and Jobs Act of 2017 on Real Estate Ownership and Investment
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In December 2017, Congress approved and President Donald Trump signed into law the Tax Cuts and Jobs Act of 2017 (TCJA), the most sweeping tax reform package passed in the last 30 years. This legislation affected both individuals and businesses as a whole. However, there seems to be much debate on the intended purpose. In the context of real estate, it changed the landscape entirely, with the biggest winners seeming to be investors and developers. This article discusses significant tax reform changes in real estate and whom they affected most in the last five years.

Federal Implications on the Real Estate Market

Corporate tax rate. The most significant and noticeable change made by the TCJA was the corporate income tax rate. Under the TCJA, Congress permanently lowered the corporate tax rate from the top 35 percent to a flat 21 percent for tax years beginning after December 31, 2017. This reduction made the corporate taxation much more palatable to real estate entities because the corporate rate is combined with the qualified dividends, bringing the corporate tax rate for distributions to its shareholders to 36.8 percent, almost equal to the new reduced individual tax rate of 37 percent.

Nonetheless, for the real estate industry, pass-through taxation will likely continue to dominate because the effective rate, considering distribution/dividends, is lower, and disposing of property is simpler from a tax-planning perspective through a partnership; this gives structuring firms options on how they utilize real estate. However, one beneficiary of the reduced corporate rate is the real estate investment trust (REIT). REITs are vehicles that investors use in the real estate industry. The new rate will benefit REITs that distribute 90 percent of their taxable income annually or have taxable REIT subsidiaries. REITs should consider distributing only 90 percent of taxable income to retain more cash for operations and development. Then the remaining 10 percent of taxable income will be taxable to the REIT but at a lower rate.

Section 199A: Qualified business income deduction (pass-through deduction). Under section 199, Congress sought to provide balance to the TCJA because of the reduction to the corporate tax rate. The TCJA offers a 20 percent deduction on qualified income for certain non-corporate taxpayers and captive REIT dividend income, which sunsets in 2026. This deduction, however, is a little more complicated than advertised, as it only applies to domestic, non-investment, qualified business income. This means many sole proprietors, self-employed individuals, partners in partnerships, beneficial owners of trust, and shareholders in S-corporations can use this new deduction under the TCJA. Yet, this deduction is not available to corporations that are owners of qualified pass-through entities.

Ultimately, if a taxpayer is in the highest tax bracket and can claim the full deduction, it will lower the effective rate on federal income to 29.6 percent. Nevertheless, there are two significant hurdles taxpayers must meet to qualify: (1) meeting the definition of a qualified trade or business and (2) fitting under the individual income requirement.

Generally, qualified business income includes domestic income from a trade or business. Conversely, it does not include employee wages, capital gains, interest, dividend income, and specified service businesses. The individual income of $157,000 ($315,000 if filing jointly) begins the phase-in and is fully phased in at $217,500 ($415,000 if filings jointly). Once phased in, the deduction is limited to the greater of two amounts: (1) 50 percent of the taxpayer’s allocable share of wages or (2) 25 percent of the taxpayer’s allocable share of wages.

Section 1031: Like-kind exchanges. While the stripping of like-kind exchanges is a significant blow to industries specializing in personal and intangible property (e.g., rental cars and sports contracts), the real estate investor was the big winner. Nonetheless, real estate has become a significant industry for non-recognition gain with a pen stroke. Currently, taxpayers who exchange real estate that is the same type or “like kind” do not have to recognize gain so long as the property was used for business or held as an investment. Taxpayers must exchange that property solely for other business or investment property of like kind.

Moreover, the properties are like kind if they are of the same nature or character, even if they differ in grade or quality. For example, an apartment building would generally be “like kind” with other apartment buildings; however, real property in the United States is not like kind with property outside the United States. Yet, an exchange of real property held primarily for sale still does not qualify as a like-kind exchange.

These changes help investors and developers while hurting individual homeowners who wants to use their property as a non-recognition investment.

Depreciation. Under the TCJA, the real estate industry received an additional benefit under depreciation. Businesses may temporarily take 100 percent bonus depreciation on qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. After 2023, full depreciation will phase down 20 percent each year for real property placed into service after December 31, 2022, and before January 1, 2027.

In addition, the TCJA eliminated the requirement that the original use began with the taxpayer and issued a “new to you” rule that included used property. The new definition included used qualified property to be eligible for 100 percent bonus depreciation; however, the used property must fit under specific factors, and taxpayers should consult a tax professional to make sure their used property qualifies. This was a significant and favorable change to the bonus depreciation rule in favor of real estate investors and developers.

The Internal Revenue Service (IRS) issued guidance that allows taxpayers to make a late bonus depreciation election or revoke an election for a particular property acquired after September 27, 2017. Under the TCJA, a taxpayer can elect out of 100 percent bonus depreciation or elect to take 50 percent bonus depreciation.

The TCJA increased the maximum amount of assets a taxpayer may expense to $1 million under section 179. It also increased the amount at which the deduction begins to phase out from $2 million to $2.5 million. The $1 million limitation is reduced (but not below zero) by the amount by which the cost of a qualified property placed in service during the taxable year exceeds $2.5 million. For taxable years after 2018, there is an inflation adjustment for the $1 million and $2.5 million limitation. Moreover, the definition of section 179 property expanded to include improvements made to nonresidential real property placed in service, including roofs, heating, ventilation, air-conditioning property, fire protection, alarm systems, and security systems. These additions and increases only served to help investors and developers to establish increased financing in the real estate industry. Moreover, the new depreciation rules allow immediate tax benefits that investors and developers would have to take two or more years to receive.

Business interest expense. Some have argued that section 163(j) interest expense may have the most effect on the real estate industry. With the TCJA focusing on limiting the interest expense deduction, some see the leverage of real estate companies as under attack because leasing of real estate is simply off-balance-sheet financing for many companies.

The TCJA specifies all business interest expense deductions be limited to 30 percent of adjusted taxable income. The limitation applies to a taxpayer with $25 million or more gross receipts for the prior three tax years. The three-year lookback ensures that real estate entities will not have the ability to plan out of their gross receipts to come under the $25 million threshold. At first glance, most people would not think real estate entities would reach the $25 million threshold and would have the opportunity to deduct all their interest expenses. The TCJA specified two hurdles real estate companies must overcome to plan out of section 163(j) and deduct their entire interest. First, complex aggregation rules require real estate entities with various ownership interests to aggregate their receipts. Second, the entity can’t be considered a “tax shelter.” A tax shelter is any partnership or entity whose plan or arrangement is the avoidance or evasion of federal income tax.

However, TCJA provided an exception to allow a “real property trade or business” to elect out of the limitation as a trade-off for applying a longer depreciation life span to specific property. If the definition is applied, deductions have unlimited carry forward at the entity level. There is some clarity needed concerning whether an upper-tier entity (equity fund) that indirectly invests in real estate assets through a lower-tier entity will be considered a real property trade or business such that it also has the benefit of electing out of the limitation.

Net operating losses and excessive business losses. The TCJA modified the net operating loss (NOL) rules. NOLs are no longer allowed to be carried back to prior tax years and are only deductible on a carryforward basis. Now, businesses may carry forward NOLs indefinitely without any expiration. Furthermore, the TCJA limits the NOL deduction to 80 percent of taxable income for the year instead of its usual 100 percent. This new rule allows REITs and other real estate entities to offset income using NOLs and apply to losses in taxable years beginning after December 31, 2017. Businesses need careful tracking of all NOL carryforwards.

The TCJA added a hurdle when dealing with excessive business losses. Starting with tax years ending after December 31, 2017, and before January 1, 2026, the TCJA limits a business loss for the non-corporate taxpayer. A non-corporate taxpayer is allowed a deduction for business losses equal to the amount of business, plus $250,000 ($500,000 if filing jointly) for a taxable year. These limits will adjust for inflation.

If the taxpayer exceeds the loss limit, the taxpayer will have an excess business loss, which the taxpayer can deduct as an NOL carried forward in subsequent years. Moreover, the losses may not offset non-business income such as interest income or portfolio income or gain. Partnerships and S corporations apply these rules at the partner or shareholder level.

State and Local Tax Impact of the TCJA

With the significant overhaul of the federal tax code, many changes affected the real estate market and homeownership for individuals and pass-through entities. Two of the significant changes on the local level were the state and local tax (SALT) deduction cap of $10,000 and the mortgage interest deduction.

SALT cap of $10,000. Before the TCJA, individuals could deduct an unlimited amount of state and local taxes, real estate taxes, and property taxes on their federal tax returns. The TCJA imposes a $10,000 limit ($5,000 if married filing separately) for federal deductions allowed for individuals and pass-through taxpayers regarding state and local taxes. However, this cap does not apply to C-corporations or other business entities. The cap made purchasing and owning a home in high-tax states more challenging. The cap could lead families to deal with double taxation without the limitation, which further harms the landscape for individuals and helps investors take advantage of the work-around.

Pass-through entities. There’s a growing trend among states to allow the adoption of elective pass-through entity taxes (PTETs) to offset the impact of the SALT cap limitations. Pass-through entities in growing numbers are taking advantage of entity-level state elections as a measure of relief from the $10,000 federal deduction limitations. Unlike individuals, who are struggling to bypass the cap restrictions due to constant rejections by the IRS and Treasury Department, pass-through entities use this work-around to shelter them from the cap limitation.

The IRS released guidelines under Notice 2020-75, which permitted a deduction of state and local taxes imposed on and paid by a partnership or S corporation on its income. The PTET allows the entities to pay state-level taxes on business income at the entity level and then claim a corresponding federal deduction, which permits individuals, shareholders, and partners to maximize their eligible deductions subject to the cap. This election gives individual owners relief from total tax liability. Federal lawmakers will continue to debate the SALT cap now and until it sunsets after 2025.

Connecticut was the first state to provide relief and the PTET work-around. Several states followed after the IRS released the guidance above. Two states in particular—California and New York—have offered in-depth guidance. Both states generally follow the standard SALT cap work-around formula; however, they have drafted significant differences, highlighting a lack of uniformity and potential planning issues for taxpayers.

California and New York considerations for PTET. California’s PTET allows certain pass-through entities to pay a “net tax” equal to 9.3 percent of distributive shares of California-source income of a consenting partner, member, or shareholder. Only consenting partners or members who elect the PTET are eligible for the corresponding credits on their state returns. However, this election is not available to disregarded pass-through entities for federal tax purposes or owners that are also partnerships, are part of a combined group, or are publicly traded.

New York’s PTET permits federal and state classified entities, S-corporations, and non-publicly traded partnerships to elect to pay an entity-level state tax on income that corresponds to the state personal income tax. However, this election does not apply to sole proprietors or disregarded single-member limited liability companies (LLCs). Additionally, an entity’s election to pay the tax is irrevocable for all partners, members, or shareholders.

Unlike California, which excludes non-consenting partner income from the elective PTET, New York includes all state pass-through income when computing taxable income for an electing entity. In addition, New York issues a corresponding credit to all direct partners, members, or shareholders in proportion to their respective owners.

The states even have differences in the expiration date of PTET. California’s law expires with the expiration of the SALT cap under the TCJA. However, the New York election expiration date is not concurrent with the sunset of the federal SALT cap. In addition, the period to opt into the New York PTET has ended for the tax year 2021, but for tax years 2022 and after, an eligible entity can opt in on or after January 1 but no later than March 15 of the tax year. These significant work-arounds aid investment and development in the real estate market and leave the typical homeowner wondering how they are protected. These effects may not lead to immediate problems but could cause long-term devastation to shared homeownership as we know it.

Mortgage interest deduction. One quasi-win of note is that an individual taxpayer who owns real estate can benefit from the mortgage interest deduction (MID). Among the itemized deductions, it grants homeowners the ability to deduct MID on either their first or second residence. With a sunset date after 2025, the TCJA limits the deduction to the first $750,000 in principal value, down from $1 million. While the deductibility of MID moves tax treatment to a mere consumption tax, there are still issues with MID. Only high-income taxpayers are likely to itemize their returns and are often the primary beneficiaries of the deduction. The real value of the MID increases with the home’s value, which benefits the wealthy individuals, not middle-class home buyers. Wealthy individuals are also more likely to participate in real estate investments, which only gives these same individuals double benefits.


The TCJA made a substantial change in the taxation of real estate but none more than in the area of investors and developers. The above discussion is not a complete, comprehensive study of all the provisions affecting the industry, but it gives a good picture of how investors and developers can use it to their advantage. These provisions are complex and currently undergoing changes and updates through rulings, regulations, and cases. There could be more on the horizon for all the changes we have seen.

With so much change, discussions and planning on how to structure asset ownership or draft joint venture documents to ensure long-term success are critical. It is recommended that individuals always consult with a tax advisor to set up a solid strategy for how best to take advantage of the benefits given by the TCJA.

It seems as if the TCJA’s intended purpose was to give investors and developers a leg up to do long-term business in the real estate market, an advantage single-family homeowners can only dream of receiving. The intention was to uplift the real estate business, not the individual homeowner, something the TCJA delivers.

IRS Resources on the TCJA