The final Republican tax bill coming up for a vote this week promises to hit some high-income New York area taxpayers hard. But commercial real estate owners have reason to cheer.
The bill, which includes deep tax cuts for corporations, reduces the tax rate and provides a steep deduction for some businesses structured as partnerships, limited-liability companies and other so-called pass-through companies, which is how most real estate businesses are set up.
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In fact, real estate businesses appeared to fare better than other pass-through businesses, which pay taxes through individual returns. Not only does the proposal drop the top individual marginal tax rate, but the plan also gives a 20% deduction on taxable income to pass-through businesses owned by individuals making less than $157,500 and joint filers making less than $315,000.
In addition, the bill gives some owners of pass-through companies who exceed those income levels another method of qualifying for that deduction that benefits private real estate partnerships with few employees and large real estate holdings, tax lawyers noted.
"If enacted, the commercial real-estate industry will have hit the jackpot," said Steven M. Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution.
The tax package's main goal is to provide incentives for businesses to move away from the mentality of "preservation of capital" to growth, said New York developer Steve Witkoff. "The psychic value is that you finally have a government saying we are creating incentives for you under the tax code to build more, create more manufacturing facilities and create jobs."
Some developers worried that the tax bill's broader changes, such as residents losing the ability to fully deduct state and local taxes, could weigh on the region's economy. The final version caps the deduction, which can run well into the tens of thousands of dollars for high earners, at $10,000. The standard deduction, used by people who don't itemize their tax returns, almost doubles under the tax bill, however.
Higher federal tax bills for some workers likely will weigh on companies' decisions of where to locate employees and their inclination to put them in major central business districts such as New York City, said Jonathan Mechanic, a partner at law firm Fried, Frank, Harris, Shriver & Jacobson LLP.
"While I am not suggesting a mass exodus, this impacts how they allocate people to major central business districts in gateway cities," Mr. Mechanic said.
Francis Greenburger, chief executive of real-estate company Time Equities Inc., fears that provisions increasing individual taxes in high-tax states could prompt some wealthy residents to leave the state, taking their businesses, jobs and tax revenues with them. "I'd rather have a healthy economy than have a bad economy and pay a lower tax," Mr. Greenburger said. "It's short-term thinking."
For commercial property owners, the final bill presents a bigger victory than many expected.
In the previous Senate version of the bill, high-income partners in private real estate partnerships were limited from taking advantage of the pass-through deduction with a restriction based on the wages the business paid. The final bill added another formula that uses the acquisition of a depreciable property, such as an office building, in calculating how much income qualifies for the deduction, said Mr. Rosenthal. That helps property owners who don't necessarily have many employees.
Commercial real estate owners also avoid limits on deductions for interest expense that will be imposed on other businesses. And the final tax bill preserves the "1031 exchange" provision for real estate investors, allowing sellers of real estate to defer capital-gains taxes by reinvesting the proceeds in some types of properties.
Some developers were buoyed by the overall tax plan and, more specifically, measures they say could spur growth for businesses that lease commercial properties and higher wages to offset the sting of higher individual taxes some would face.
The provision allowing for businesses to fully expense certain investments immediately rather than deducting them over time could make it easier for companies to consider expanding offices, said Mr. Witkoff.
Write to Keiko Morris at Keiko.Morris@wsj.com
(END) Dow Jones Newswires
December 17, 2017 20:27 ET (01:27 GMT)