You’re Invited to Learn About the New Tax Laws That Are Affecting Commercial Real Estate
Please join us for an informative live presentation with Dan Adams, Senior Vice President & Commercial Lending Manager at Wells Fargo. Dan will be taking us through the changes, how they affect commercial real estate, and also conducting a Q&A to answer any questions you may have. Come prepared and ready to learn how you can maximize your business, personal, and investment strategy.
Date: March 29th, 2018
Location: KW Commercial Del Mar/Carmel Valley
Seats are limited to 30! Sign up today to secure your spot!
Registration is free and we encourage donations to Autism Tree Project Foundation (ATPF).
The Autism Tree Project Foundation helps spread community awareness for autism. Their goal is to give children on the autism spectrum a voice and additionally aims to build community compassion towards the parents and families of these special children. ATPF helps thousands of families with autism create a roadmap for their child with autism and navigate a very complex system of care required for children with Autism Spectrum Disorder.
All monies donated to ATPF go straight to helping real families in our community through one of their 20 critical programs. These programs are on-going and provided to families at no charge, making the Autism Tree Project Foundation very unique. They are a grassroots foundation and have only 1 full-time employee on staff. They do not charge any of their families for ATPF programs.
Earlier this month we asked you for your top questions on the new tax law. Dan was generous enough to answer some. Here’s the top 5:
1. There are new rules for Sub S corp and LLC’s. Do they apply to real estate in single asset entities?
Yes, the new pass-through rules apply to single asset (real estate) entities. This means that the 20% deduction of pass-through net income applies to the rental real estate owned by a business, an individual, or a living trust.
2. Are there any changes in expensing acquisition costs that were capitalized in the old tax rules?
No, those rules remain exactly the same.
3. Are there changes in the Alt Min Tax rules for passive investors?
Yes, there are significant changes to the Alternative Minimum Tax (AMT). Generally speaking, the AMT has basically been eliminated. It would be extremely rare for an active or passive investor to be subject to the AMT anymore. I have read some comments that the IRS now expects the AMT to impact fewer than 1,000 individual taxpayers going forward.
4. Any changes in 1031 or installment sale rules?
Yes, we can now only exchange real property (not tangible personal property like improvements). That creates a difficulty for buildings which had a cost segregation study done, in that the short-life assets would be taxed as boot (taxable gain) in the exchange. Ideally, the replacement property would need to have a cost segregation study done immediately so that the additional depreciation from that could be used to offset the taxable gain from the exchange boot.
5. How are the taxes on each property affected as far as tax write-offs? It seems if they only allow a certain amount of taxes to be written off, it is going to affect the property prices?
The $10,000 state and local tax limit applies to state income taxes and property taxes paid on your primary, secondary, or investment properties only. There is no limit on business properties or rental properties that are owned by a corporation/LLC. There is a chance that owning a home is less lucrative now because of the tax limitations. This could artificially increase demand to rent a home instead of own it.
Click here to check out our tax article about the Tax Cuts and Jobs Act
Interview with Globest
In a recent article with Globest, Dan discussed some of the recent changes.
Below are a few highlights of the article, to view the full interview, click here
- Dan believes the new tax laws are positive for the industry by creating certainty.
- The tax policies ability to spur GDP growth is an indicator of the increase in the demand for office, industrial, warehouse, and other commercial property.
- The new tax law made numerous changes that will favorably affect commercial real estate as an asset class, including indirect changes such as reductions in tax rates.
- The law provides for a 20% reduction of business income for most pass-through entities.
- 1031 Exchanges are now only available with real estate.
- The increase in estate-tax exclusion to $11 million per person should be viewed as favorable since those are the assets that most often appreciate and are inherited by heirs.
- The demand for single and multi-family properties will go up as the tax advantage of owning a home has been significantly reduced.
- US-Based Manufacturing will increase, which could drive demand in that sector.
- Although it’s been said California was hit harder than other states, much has been exaggerated. The $500,000 capital-gain exclusion for sale of principal residence still exists.
- The new tax law isn’t a “one size fits all” situation. Brokers should consult their tax professional and figure out how to structure their business, their income, and their investments in a way that maximizes the advantages of the new tax law.
Daniel Adams – Senior Vice President, Business Banking Area Manager, Wells Fargo Bank – Dan leads a team that provides commercial real estate loans, treasury management, and credit lines to businesses in Southern California and Nevada. They provide loan structuring, underwriting and risk analysis for operating businesses and commercial real estate investors, and also offer working capital optimization technologies to help businesses operate more efficiently. Dan’s team originated over $300 million in loans in each of the past four years, including Small Business Administration, Healthcare Finance, Equipment Leasing/Purchases, and conventional lending products. Dan is a veteran U.S. Marine artillery officer with multiple deployments to the Middle East and Southwest Asia and also an adjunct Graduate Finance Professor at several local universities.
Wells Fargo’s Business Banking Group serves the needs of small- to mid-size privately held businesses throughout the country. They provide a proactive approach to a team of local Relationship Managers and others to provide customized service and rapid response to help our customers succeed financially.
Questions about the event? Contact us here
For those of you who haven’t been following the JOBS Act, it is a bill that will make it easier for startups and small businesses to raise funds, especially through online crowdfunding, is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.
The JOBS act was designed to help small businesses by:
1. Removing general solicitation and advertising restrictions for certain private offerings
- Rule 506 – If all purchasers are accredited investors
- Rule 144A – If issuer reasonably believed all purchasers are qualified institutional buyers
2. Creating a new $1M crowdfunding exemption, allowing non-accredited investors to participate in the funding rounds
- Up to $1M of securities in a 12-month period
- Investor’s net worth <$100k they can purchase greater of $2k or 5% of annual income or net worth
- Investor’s net worth $100k+ they can purchase 10% of annual income or net worth up to $100k
The SEC will have a 270 days to implement additional regulations from signing of the bill.
If you are a real estate investor who may be looking to raise private capital through this vehicle you may want to start planning in the meantime.
Planning is the foundation to your success, Execution is the material that creates the business. Execution without planning is like wanting to drive to Fargo without a map. You may end up getting there but a little planning could have saved you a lot of time.
- Check out my previous blog post where I lay out business planning and goal setting:
- Get all the documents in place. Including your business plan, incorporation documents , financial analysis & forecasts and a full executive team bio.
- Do market research. Get all the facts in place in order to have a strong argument as to why people should fund your project.
- Start putting together a list of contacts and potential investors.
- The concept of crowd funding involves work from the user seeking funds as they need to leverage their networks and ask their networks to lend a hand. We found that the initial 30-40% of activity actually comes from the users’ network.
- Start to craft your pitch in the best possible way. If someone asks what you do can you explain it in 30 seconds or less? Do you know what your most common questions are and the answers to those questions?
- Start building your social network presence. Remember crowd sourcing is based on smaller amounts of money from multiple people. Start building your network and credibility
Time will tell exactly how much impact the JOBS Act will have on the job market and raising money for Real Estate
Some reasons it may not make sense:
IF the SEC:
- Makes it to costly to set up
- Makes it to complicated to create
- Has to be sold through securities brokers
- It may be to cumbersome to have a lot of little investors on deals.
- More red tape and reporting requirements
I am not sure yet whether this is a good thing or not. It really depends on the SEC final terms which I will report on when the grace period is over.
For the most updated information & news on real estate & Gabhart Investments go to our Facebook & twitter pages
The HARP2 program, combined with the $25B bank settlement (providing $20B in loan modifications), will save some underwater mortgages from foreclosure and help long-term market stabilization. However, part of the bank settlement requires banks to adopt standardized (and hopefully more efficient) servicing and foreclosure processing measures. I think better processing, combined with the sheer volume of underwater mortgages is going to keep the short sale floodgates open for quite some time.
According to researchers at CoreLogic, a leading analytics firm, 11.1 million or 22.8 percent of all residential properties in the United States were worth less than the amount their homeowners owed on the mortgages used to purchase them.
The federal government originally rolled out the HARP program in 2009 to help homeowners who were underwater or near underwater. However, the program was recently broadened to reach even more borrowers. Originally, HARP applied to 895,000 underwater borrowers; and now HARP II is expected to help up to double that amount. According to HUD, about 400,000 homeowners have taken advantage of the program since it launched in April 2012…that’s less than 4% of underwater mortgages.
HARP II allows underwater homeowners who are continuing to make payments to refinance their loan. The new program offers a number of advantages over the original HARP loans. First off, there is no loan-to-value or combined loan-to-value restriction on fixed-rate loans with terms of 30 years and under. In other words, it doesn’t matter how upside-down borrowers are on their mortgages. Previously, there was a cap that restricted borrowers who owed more than 125 percent of their home’s current worth from accessing the program. In addition, an appraisal may be waived if a value for the home can be automatically generated, and the borrower only needs to have a 620 FICO score.
There are three main components to qualifying for a HARP II refinance loan. The first requirement is that the loan must be owned by either Fannie Mae or Freddie Mac. Second, the loan must have been sold to Fannie or Freddie before June 1, 2009. Third, a HARP II refinance must benefit borrowers in at least one of four ways:
- Reduce the loan’s monthly principal and interest payment.
- Reduce the loan’s interest rate.
- Reduce the loan’s amortization term.
- Transition the loan to a more stable type of loan. (i.e. interest-only to fully-amortizing, adjustable-rate to fixed-rate, 30-year to 15-year).
For the most updated information & news on real estate & Gabhart Investments go to our Facebook & twitter pages