Here are some issues in the tax law that remain foggy
It's unclear how deductions will apply to pass-through entities
In many ways, the new federal tax law is a major boon to the real estate industry. But several issues — including some surrounding the deep deductions awarded to pass-through entities — remain ambiguous.
For one, it’s unclear how the 20 percent deductions on pass-through incomes will be calculated in certain cases. Many real estate companies own several different entities, some of which bring in little to no income. It’s not yet known if the income from various LLCs can be aggregated to calculate the deduction, according to BDO USA’s Robert Klein.
On Tuesday, Klein and his colleague Amy Rosenthal discussed the various positive and negative impacts expected from the new legislation during an event held by B’nai B’rith New York City Real Estate. Another issue is whether property management companies will qualify for the pass-through deductions because service businesses — such as those offering financial and brokerage services — are excluded. Various service and development service fees are associated with property management.
Rosenthal noted that certain rules governing how the pass-through deduction is applied to real estate investment trusts could guide investor behavior. Those who invest directly into an UpREIT or DownREIT receive a 20 percent deduction. But for those investing in an operating partnership, the law restricts the deduction based on wages.
“There is potential that if you’ve invested in the operating partnership, you’re going to owe more taxes,” Rosenthal said. “The REIT doesn’t have those wage limits; you just get a plain 20 percent, so that’s something to watch for.”
Of course, there’s one area of the tax law that many view as unambiguously negative. Rosenthal noted that new bill caps the amount of state and local taxes, otherwise known as SALT, that can be deducted from their federal tax bill at $10,000.
“We are in New York, so we’re screwed,” she said.