2019 Year-End Tax Planning Advice for Commercial Real Estate Investors and Owners, and 2020 Outlook

Naden/Leans’ industry expertise includes manufacturing, technology, professional services, healthcare, nonprofit, restaurants, and this month’s focus: commercial real estate. In October’s Industry Focus, we explore the industry trends impacting decisions for 2020 and options for 2019 year-end tax planning.

Do you have a stake in the commercial real estate (CRE) sector? At this time of year, it’s important to review CRE trends, the 2020 outlook, and possible tax-saving opportunities that can make a difference to your bottom line. 

That’s why this month’s Industry Focus is taking a closer look at commercial real estate for owners and investors. How do you measure up?

Commercial Real Estate Trends and 2020 Outlook

Commercial real estate continues to be a solid investment. Long-term growth looks favorable, even if it is at a slightly slower rate than in recent years, and stable returns indicate that it may be a good time to add to your CRE portfolio. Remember that newly created Qualified Opportunity Zones offer several tax benefits, some of which you can utiilze in next year’s taxes if you act now.  

Location is always important, but CRE stakeholders are shifting their focus to the tenant and customer experience to compete with the appeal of online shopping. So, look for new technologies like AI to enter the market and change the way we think of brick-and-mortar retail. If you’re considering adding new technology to the customer experience in properties you manage, you may be able to claim the R&D tax credit — read our previous post that explains how.  

CRE owners and investors are also preparing for a huge demographic shift in the workplace: by 2020, 70 percent of the workforce will fall within millennial or generation X parameters while baby boomers will make up only six percent of the workforce. 

This means successful CRE operations will need to cater to different generational demands. Get ready for the new normal; both office and retail buildings are being designed to foster collaboration and work-life balance.

2019 Year-End Tax Planning Strategies for CRE Owners and Investors

With fewer weeks remaining in 2019, this is your last chance to maximize year-end tax savings as a commercial real estate owner or investor. Some of the benefits The Tax Cuts and Jobs Act (TCJA) may still be new to you, so we created a cheat sheet that highlights the most important changes to consider at year-end. As always, your CPA can provide personalized guidance and advice.  

Here are common year-end tax planning strategies for CRE owners and investors:

  • Section 179 and Bonus Depreciation: The TCJA increased the value of this deduction in a big way. Beginning in 2018, commercial property stakeholders can write-off the cost of any qualifying new or used property asset up to $1 million. (The inflation adjustment actually makes this amount $1.02 million for 2019.)

The law also changed the definition of qualifying expenses to include roofs, HVAC equipment, fire protection and alarm systems, and security systems for commercial buildings.

Check with your tax professional to be sure that you meet the requirements for this deduction and to see if you might be a good candidate for a formal cost segregation analysis, which can infuse money into your business immediately by way of potential tax savings. 

  • Capital Gains Taxes: Did you recently sell a CRE asset? Did you make a profit? If the answer is yes, then you may owe capital gains taxes. The rate varies based on length of ownership and whether these funds were used to purchase a “like kind” property. You may be able to offset these costs with proper tax planning. 

One such vehicle is the new Opportunities Zones program, which lets you defer paying capital gains taxes until December 31, 2026. Basically, you invest at least 90 percent of your earnings from the sale of a CRE asset into an approved, low-income area that needs redevelopment. To discuss this program in greater detail, set up an appointment with your CPA. 

  • QBI: The qualified business income deduction has become slightly more complicated since the TCJA in 2017. It’s still commonly called the 20 percent pass-through deduction, but some of the law’s language has left tax-payers and tax professionals in murky territory. 

Thankfully, the IRS recently issued new guidance to help the public wade through this part of the new tax law. Generally speaking, if your CRE can be considered a trade or a business, then it falls under Section 199A, but if your CRE acts as a rental property, then it falls under Section 162. Either way, your CPA needs to look at your case individually to see how to apply the deduction and if it would be beneficial to you. 

  • TPR: Tangible Property Regulations have been in effect since 2014, and the TCJA did not change this part of the tax code. It’s worth mentioning though because it involves some strategy and long-term tax planning. 

These regulations allow you to analyze each piece of commercial property with your CPA and then determine if they should be individually expensed or capitalized. Furthermore, you can determine if certain repairs to these properties should be expensed to save tax dollars now or capitalized to add value to the building. 

Next Steps for CRE Owners and Investors

Are you ready for the next decade of commercial real estate opportunities? Or are you more focused on year-end tax planning strategies? Either way, Naden/Lean’s real estate experts will be able to help you accomplish your financial goals. Contact us to get started.