![](\"https:\/\/www.floridarealtors.org\/sites\/default\/files\/styles\/full_width_main_image\/public\/page\/image\/2018-12\/firpta.jpg?h=6eaae919&itok=YapnthJI\")
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A 2017 tax overhaul changed the rules; a new proposal could do the same. Investors should understand all possible changes before they select new investment options.<\/span><\/span><\/p>\n<\/div>\n WASHINGTON \u2013 The Tax Cuts and Jobs Act of 2017 (TCJA) created a sweeping overhaul of the U.S. tax landscape \u2013 the biggest set of changes in 30 years. Among the key provisions from that legislation for real estate businesses were:<\/span><\/span><\/p>\n Although TCJA was passed in 2017, significant final and proposed federal regulations and other guidance continue to be released. Then, with the current pandemic, there has been the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which contains numerous revisions to the TCJA. Ongoing change is also inevitable at the state level, as state and local jurisdictions either conform or diverge from the TCJA.<\/span><\/span><\/p>\n However, proposed policy changes from the Biden administration may yet again change taxes for real estate investment. The recent American Rescue Plan Act was light on tax aspects that may affect commercial real estate, which is already hard hit by the effects of the COVID-19 pandemic.<\/span><\/span><\/p>\n Newly proposed tax updates<\/strong><\/span><\/span><\/p>\n On March 31, 2021, President Biden and the White House released the $2 Trillion \u201cAmerican Jobs Plan\u201d which is aimed primarily at upgrading infrastructure, electric grids, broadband capacity, and expanding affordable housing.<\/span><\/span><\/p>\n According to a fact sheet released on March 31, the Made in America Tax Plan was proposed alongside the American Jobs Plan. The key takeaways from the tax plan that would affect private equity investors in real estate are:<\/span><\/span><\/p>\n If these pass, private equity investment firms will be seeking ways to minimize their tax burden. Private equity real estate investors may restructure the entities they own to work around these taxes.<\/span><\/span><\/p>\n The President says he looks forward to working with Congress and will be putting forward additional ideas in the coming weeks for reforming the tax code.<\/span><\/span><\/p>\n This current tax environment impacts transactions in some significant ways, whether it is tax due diligence, pricing and valuation, deal financing and structuring, or any post-deal integration. Private equity investors can turn this tax uncertainty into potential opportunity by being proactive and engaging with tax advisors from the outset of the deal.<\/span><\/span><\/p>\n Based on what President Biden said during his presidential campaign, other tax policy proposals that may be forthcoming in the next round of tax legislation having serious considerations for private equity investors include:<\/span><\/span><\/p>\n President Biden plans to keep the incentives for eligible projects but include more disclosures and transparency, which will create more scrutiny for investors. Biden\u2019s proposed increase in capital gain tax rates may also have a negative impact on QOZs as current gains are deferred and taxed at a potentially much higher rate in 2026. <\/span><\/span><\/p>\n On the other hand, an increase in capital gain rates would make the tax-free exit from a QOZ investment more attractive, assuming the increased rates are still in place after the required 10-year holding period. Also, if Section 1031 like-kind exchanges were to go away, there may be a surge in QOZ investments to seek at least a limited tax-deferral.<\/span><\/span><\/p>\n Regarding cash liquidity for private equity investors in the commercial real estate sector: The bottom line is always to maintain or increase liquidity and mitigate or defer tax liability. Some private equity sponsors may choose to use traditional tax planning strategies to achieve these goals; others may use strategies that plan around the recent tax reforms to defer income, accelerate deductions, and fully utilize losses. Reclassifying and accelerating asset depreciation through a cost segregation analysis can yield significant results in terms of cash flow and tax savings. This cost segregation may be performed for various real estate asset classes.<\/span><\/span><\/p>\n\n\n
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