Tax Cuts and Jobs Act Retains Most Real Estate Incentives
Early drafts of President Trump's tax plans threatened to eliminate or substantially reduce key federal incentive programs that promote real estate development. The irony was not lost on real estate development trade groups: Our first president who made his fortune in real estate development was taking steps that would measurably slow the industry!
The final version of the Tax Cuts and Jobs Act, passed on December 22, 2017, turned out to be much different, however. Now that the dust is settling, and the tax and business community has had a chance to start sorting through the practical application of the Act, it is safe to say that real estate development in America will be pretty much business as usual.
The Tax Cuts and Jobs Act kept most of the project-based business tax credit incentives intact, including the New Markets Tax Credit, Historic Rehabilitation Tax Credit, Renewable Energy Tax Credits, and the Low Income Housing Tax Credit. A new bill, the Investing in Opportunity Act, was incorporated into the Tax Cuts and Jobs Act as well.
The New Market Tax Credit (NMTC) and Investing In Opportunity Act
The NMTC remains available through at least 2019.The program will continue to provide a $3.5 billion allocation each year.
Similar to the NMTC credit program, the Investing in Opportunity Act enables states to establish “opportunity zones” where investors may defer capital gains as long as they invest in existing or new businesses. The program uses the same eligibility criteria as the NMTC program for determining low-income opportunity zones. The Opportunity Act potentially replaces the NMTC when it expires at the end of 2019.
Historic Rehabilitation Tax Credits (HTC)
The non-historic credit (10 percent) for pre-1936 buildings is repealed and the credit for certified historic structures remains at 20 percent. However, investment in historic properties may become less attractive to investors because now the credit must be taken ratably over five years rather than all at once.
Renewable Energy Tax Credits: PTC and ITC
The bill makes no changes to the production tax credit (PTC) or investment tax credit (ITC). The PTC is available for projects at the current rate and retains the inflation factor. The ITC also survives and rates are based on the project start date: 30 percent through 2019 with a phase down to 22 percent by 2021. After the phase down, the rate becomes 10 percent.
Low Income Housing Tax Credit (LIHTC)
This tax credit remains unchanged. However, the lower corporate tax rate and revised CPI is projected to lower the value of LIHTC credits to investors.
Base Erosion and Anti-abuse Tax (BEAT)
To protect the tax base of foreign-owned corporations or U.S. corporations with significant foreign operations, the Tax Cuts and Jobs Act includes the BEAT. This provides a base erosion minimum tax of 5 percent in 2018, 10 percent in 2019 through 2024 (11 percent for banks and securities dealers), and 12.5 percent after 2025 (13.5 for banks and securities dealers). The Tax Cuts and Jobs Act provides that certain general business credits may be claimed against BEAT liability through 2025 (100 percent of research credits but only 80 percent of low-income housing tax credits, investment tax credits, and production tax credits).
If you have additional questions regarding one or more of these credits or are interested in how to utilize them, please contact us.
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- Tax Advisory, December 5, 2018
- State Tax Notes, September 3, 2018
- Tax Blog Post, August 3, 2018