Here’s a tax incentive grand slam for residential real estate investors: a low-income housing rebuild retrofitted with solar in an opportunity zone.
Blake Christian, a partner with HCVT, a Top 30 accounting firm in Los Angeles, says those are all in place at a project he’s working with in Utah, where he’s based at his company’s Park City office. His practice includes a focus on tax-advantaged real estate investing strategies.
That means Christian is paying particular attention to certain parts of the $1.4 trillion appropriations bill signed into law as the year ended. That measure includes $900 billion in pandemic relief and tax revisions and extensions that could save investors a lot of money while furthering goals such as boosting affordable housing and investment in renewable energy.
A bill with no name but lots to work with …
The massive package contains a number of follow-ons to the predecessor Tax Cuts & Jobs Act of 2017 and the CARES Act earlier this year, but it doesn’t have a catchy name beyond the "Consolidated Appropriations Act." It’s typically being referred to in the press as, for instance, the relief act or stimulus bill.
Along with $25 billion in rental assistance and $284 billion for another round of Paycheck Protection Program loans, the new bill includes:
· A permanent 4% Low-Income Housing Tax Credit (LIHTC).
· A $1.2 billion allocation of non-COVID disaster LIHTCs for Puerto Rico and 11 states.
· A five-year extension of the New Markets Tax Credit (NMTC).
· Changes in depreciation schedules for residential rental property.
· Extensions of various renewable energy tax credit programs.
A smaller depreciation window and cost segregation
Christian noted there’s another provision in the Consolidated Appropriations Act that should be of particular interest to residential real estate investor-owners. Now, all residential rental real estate is covered by a 30-year alternative depreciation system (ADS) recovery period, instead of 40 years, regardless of when the property was placed into service.
The Tax Cuts & Jobs Act had limited that 30-year period to rental property placed into service after Dec. 31, 2017. The ADS rules involve business interest income, the taxpayer’s adjustable taxable income, and floor-plan financing interest.
So, what should real estate investors in search of depreciation and other deductions pay the most attention to this tax filing season? “You should look at cost segregation,” Christian says. That can help determine whether to take deductions now or push them into the 2021 tax year.
Solar energy tax incentives shine the brightest light
Christian said the solar energy tax incentive extensions -- with their 26% tax credits, generous depreciation, and "pretty liberal start date rules" -- are the "highest-value provisions in the entire appropriations act" for his clients.
He said there’s also a new tax credit for energy recovery systems that he doesn't have specific expertise in but "could be pretty valuable." He went on: "People just starting projects should be looking at that and talking to their energy consultants to see if they can qualify. It can be for retail and office buildings, too, to the extent that kind of construction is going on right now."
Christian sees great opportunity when all those tax incentives are combined into one project, saying "it's really powerful." He added that his firm has set up more than 100 qualified opportunity funds (QOFs) -- primarily for family offices. He says combining those equity-driven incentives with the debt-driven credits from NMTC incentives "works out pretty well. But it takes some real navigating."
The Millionacres bottom line
We barely made a tiny scratch on the surface here. There are a lot of incentives for real estate investors and operators packed into the Tax Cuts & Jobs Act, the CARES Act, and now the new stimulus bill, recovery act, whatever you choose to label it. But another thing also seems clear: Don’t try this at home. Unless you’re a qualified CPA or live with one.
"I’ve been doing this for 40 years and I’ve always preached simplicity," Christian says. "I would love to see a flat tax, but these are the cards we’re dealt with. It’s the CPA full employment act all over again."