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This article provides an overview of the new tax law, formally referred to as “The Tax Cuts and Jobs Act”, as it impacts both residential property owners as well as investment property owners. The scope of this overview focuses on real estate-related tax law changes and generally does not delve into tax issues not associated...
This article provides an overview of the new tax law, formally referred to as “The Tax Cuts and Jobs Act”, as it impacts both residential property owners as well as investment property owners. The scope of this overview focuses on real estate-related tax law changes and generally does not delve into tax issues not associated with real estate.
PRIMARY RESIDENCE HOMEOWNERS
As a result of doubling the standard deduction to $12,000 for single filers and $24,000 for married filing jointly, according to Moody’s Analytics, as many as 38 million Americans who would otherwise itemize may instead choose the higher standard deduction under the new tax plan. The doubling of the standard interest deduction, in essence, removes a previous tax incentive to move from renting a residence to owning a home. A likely unintended outcome will be fewer Americans choosing to become homeowners versus renting a residence solely for the tax advantages.
Any home mortgage interest debt incurred before December 15, 2017, will continue to be eligible for the home mortgage interest deduction up to $1,000,000. Any home mortgage interest debt incurred after this date will be limited to no more than $750,000 qualifying for the home mortgage interest deduction. Beginning 2018, the deduction for interest paid on a home equity line of credit (“HELOC”) will no longer be eligible for the home mortgage interest deduction. However, the new tax law preserves the deduction of mortgage debt used to acquire a second home. This should have a positive impact on supporting property values in resort and vacation destinations.
State and local taxes (referred to collectively as “SALT”) can be deducted, but will no longer be unlimited as under previous tax law. The 2018 tax law will allow homeowners to deduct property taxes and either income or sales taxes with a combined limit on these deductions being limited to no more than $10,000. Top earners who live in a state with higher taxes like California, Connecticut, Oregon, Massachusetts, New Jersey, New York will be negatively affected the most by no longer having the previous full federal deduction available. There is the potential for home values in high state tax areas on both the West Coast and East Coast to see a reduction in property values partially due to the new capped SALT deduction at $10,000 and partially due to the new maximum $750,000 home mortgage deduction. A National Association of REALTORS study found there could be a drop in home prices up to 10 percent in these and other high state tax areas as a result of limitations in the tax law that won’t be as favorable as prior law for some property owners.
Both the House and Senate tax bills had originally proposed increasing the length of time a homeowner would need to live in a primary residence (from five out of eight years versus the current requirement to live in a primary residence two out of five years to qualify for the Section 121 tax exclusion). This proposed change did not become a part of the 2018 tax law. Homeowners will continue to only need to live in their primary residence 24 months in a 60 month time period to be eligible for tax exclusion up to $250,000 if filing single and up to $500,000 if married filing jointly. Property owners will still have the ability to convert a residence into a rental property or convert a rental property into a residence and qualify for tax exclusion benefits under both the primary residence Section 121 rules and also potentially qualify for tax deferral on the rental property under the Section 1031 exchange rules.
INVESTMENT PROPERTY OWNERS
Investment property owners will continue to be able to defer capital gains taxes using 1031 tax-deferred exchanges that have been in the tax code since 1921. No new restrictions on 1031 exchanges of real property were made in the new tax law. However, the new tax law repeals 1031 exchanges for all other types of property that are not real property. This means 1031 exchanges of personal property, collectibles, aircraft, franchise rights, rental cars, trucks, heavy equipment and machinery, etc. will no longer be permitted beginning in 2018. There were no changes made to the capital gain tax rates. An investment property owner selling an investment property can potentially owe up to four different taxes: (1) Deprecation recapture at a rate of 25%, (2) federal capital gain taxed at either 20% or 15% depending on taxable income, (3) 3.8% net investment income tax (“NIIT”) when applicable, and (4) the applicable state tax rate (as high as an additional 13.3% in California.)
Some investors and private equity firms will not have to reclassify “carried interest” compensation from the lower-taxed capital gains tax rate to the higher ordinary income tax rates. However, to qualify for the lower capital gains tax rate on “carried interest,” investors will now have to hold these assets for three years instead of the former one-year holding period.
Some property owners, such as farmers and ranchers and other business owners, will receive a new tax advantage with the ability to immediately write off the cost of new investments in personal property, more commonly referred to as full or immediate expensing. This new provision is part of the tax law for five years and then begins to taper off. There are significant concerns these business and property owners will face a “tax cliff” and higher taxes once the immediate expensing provision expires.
Investment property owners can continue to deduct net interest expense, but investment property owners must elect out of the new interest disallowance tax rules. The new interest limit is effective for 2018 and applies to existing debt. The interest limit, and the real estate election, applies at the entity level.
The new tax law continues the current depreciation rules for real estate. However, property owners opting to use the real estate exception to the interest limit must depreciate real property under slightly longer recovery periods of 40 years for nonresidential property, 30 years for residential rental property, and 20 years for qualified interior improvements. Longer depreciation schedules can have a negative impact on the return on investment (“ROI”). Property owners will need to take into account the longer depreciation schedules if they elect to use the real estate exception to the interest limit.
The tax law creates a new tax deduction of 20% for pass-through businesses. For taxpayers with incomes above certain thresholds, the 20% deduction is limited to the greater of: 50% of the W-2 wages paid by the business or 25% of the W-2 wages paid by the business plus 2.5% of the unadjusted basis, immediately after acquisition, of depreciable property (which includes structures, but not land). Estates and trusts are eligible for the pass-through benefit. The 20% pass-through deduction begins to phase out beginning at $315,000 for married couples filing jointly.
The new tax law restricts taxpayers from deducting losses incurred in an active trade or business from wage income or portfolio income. This will apply to existing investments and becomes effective 2018.
State and local taxes paid in respect to carrying on a trade or business, or in an activity related to the production of income, continue to remain deductible. Accordingly, a rental property owner can deduct property taxes associated with a business asset, such as any type of rental property.
This article is only intended to provide a brief overview of some of the tax law changes that will affect any taxpayer who owns real estate and is not intended to provide an in-depth overview of all the new tax law provisions. Every taxpayer should review their specific situation with their own tax advisor.
Article Source: netleaseexperts.com
Strangely enough…the exit strategy of your business often times is the true measure of its success. The lack of an exit strategy is usually an indication that you, as an entrepreneur, need to spend some time on your business plan. Here are a few reasons why you should implement an exit strategy — even if...
Strangely enough…the exit strategy of your business often times is the true measure of its success. The lack of an exit strategy is usually an indication that you, as an entrepreneur, need to spend some time on your business plan. Here are a few reasons why you should implement an exit strategy — even if you have no immediate intention of selling your company.
Unexpected offers may arise.
The business climate is highly competitive and changes rapidly. Larger companies are often looking for growth through acquisition. Smaller companies may look for mergers to gain a larger market share and buying power.
Health or family crisis.
A sudden illness or family issues such as divorce, death or required relocation may force you to sell your business. Having an exit strategy in place can make the selling process much easier if such a situation arises.
A recession may negatively impact your business. Having an exit strategy can maximize the value of the sale by allowing you to act quickly if the situation arises where you are forced to sell.
If you decide to sell, you‘ll want to have options beyond selling to a competitor at a low value and also time the sale for optimum return.
Informs strategic decision making.
With no planned endgame, it’s easy for business owners to get caught up more in the “job” they’ve given themselves rather than the long-term strategy behind running the business itself. An exit strategy keeps that endgame in view and allows for you to make day-to-day decisions that are more strategic in nature.
Having an exit plan is a crucial component of owning a business. Nowadays, most startups are often sold within two or three years of inception. Regardless of the type of investment, trade or business venture that is entered into, an effective exit strategy should be planned for every positive and negative contingency. Creating an exit strategy with the help of professional advisors, including a business broker, attorney, commercial real estate broker, and accountant provides a solid framework for the entire business lifecycle. Contact The Powell Group to speak with a qualified business broker about creating an exit strategy for your business today.
The purchase, sale, borrowing or even leasing options for a piece of commercial property often hinge upon the appraised value of the building. Assessing that value, however, is no simple matter. Whether it’s an apartment building, an industrial complex, a retail shopping center, or an owner-occupied business structure, commercial appraisals are generally more subjective than...
The purchase, sale, borrowing or even leasing options for a piece of commercial property often hinge upon the appraised value of the building. Assessing that value, however, is no simple matter. Whether it’s an apartment building, an industrial complex, a retail shopping center, or an owner-occupied business structure, commercial appraisals are generally more subjective than residential reviews.
Why? Commercial values are often dependent upon uncontrollable elements like the current market price for which spaces rent, fewer available comparables and overall maintenance costs (which can vary dramatically from industry to industry). And then, of course, there’s the tricky question of how much a buyer is willing to pay.
With so many variables to consider, how does an investor or small business owner price a potential property? There are three valuation methods often used to determine intrinsic value.
This valuation method considers the cost to rebuild the structure from scratch, taking into account the current cost of associated land, construction materials, and other costs that would be associated with the replacement of the existing structure.
The cost approach is generally applied when appropriate comparables are difficult to locate, such as when the property contains relatively unique or specialized improvements, or when upgraded structures have added substantial value to the underlying land.
Sales Comparison Approach
Also known as the “market approach,” this method relies heavily upon recent sales data for comparable properties. By seeking recently sold buildings with similar properties from the same market area, a buyer hopes to ascertain a fair market value for the property in question.
For example, a 12-unit apartment building might be compared to another that sold in the same neighborhood just a few months earlier. While this valuation method is typically used to value residential real estate, it does have one significant drawback. Depending on general and localized market conditions, it can be difficult to find recent comps that have similar properties.
Income Capitalization Approach
This valuation method is based primarily on the amount of income an investor can expect to derive from a particular property. That projected income could be derived in part from a comparison of other similar local properties, as well as from an expected decrease in maintenance costs.
Say a building is purchased for $1 million, and the expected yield is 5 percent, based on local market research. That $50,000 per year in expected income could be enhanced by tightening inefficiencies, or by passing along other associated costs to the tenant, like electric or water usage. All expected future income is discounted to reflect present value.
In addition to the three most commonly used valuation methods discussed above, there are several additional methods that can offer valuable insight for a potential investor.
Value Per Door
Occasionally used to value apartment buildings, this valuation method breaks down the building’s worth by the number of units. A building with 20 apartments priced at $4 million, for example, would be valued at $200,000 ‘per door’ irrespective of each unit’s size.
Value Per Gross Rent Multiplier
The Gross Rent Multiplier (GRM) is a back-of-the-envelope calculation used to measure and compare a property’s potential valuation by taking the price of the property and dividing it by its gross income. This method is generally used to identify properties with a low price relative to their market-based potential income.
In the end, every buyer values property differently. The valuation of commercial property does have a subjective and unscientific component. The best commercial real estate investors have honed their gut instincts around finding the most attractive deals, and the most effective valuation methods for each particular type of transaction. At the end of the day, no matter how much analysis has been conducted, the value of commercial real estate is always in the eye of the beholder.
Article source: firstrepublic.com
We hope your holidays will be filled with joy and laughter. We look forward to working with you all our wonderful clients in the new year. Merry Christmas to you and yours from all of us at The Powell Group.
We hope your holidays will be filled with joy and laughter. We look forward to working with you all our wonderful clients in the new year.
Merry Christmas to you and yours from all of us at The Powell Group.
In the back of their heads, many entrepreneurs are thinking, “when should I sell my business?” Owners who ponder over selling their businesses, do not always do so out of financial desperation or trouble but usually because they are looking for the next opportunity. The following are three reasons to consider when thinking about selling...
In the back of their heads, many entrepreneurs are thinking, “when should I sell my business?” Owners who ponder over selling their businesses, do not always do so out of financial desperation or trouble but usually because they are looking for the next opportunity.
The following are three reasons to consider when thinking about selling your business.
1. Business value
Colleague John Hammett is an investment banker at Corporate Finance Associates and a former company owner himself. At one point in his career, Hammett was working for an entrepreneur in his mid-50s who sold one of two divisions in his company. While working on the transaction with the company owner, Hammett learned some valuable advice that has stuck with him to this day.
“Anytime you have an opportunity to get liquidity in your company, you need to seriously consider it because running a business is risky and the longer you hold on to that business and the bigger you get, the more chance you risk of failure,” says Hammett. “There is value in a business but no liquidity until you go through a transaction of selling a piece or all of your company to a buyer.”
2. Tired of risk
In the early stages of a business, owners are more confident in taking risks, because they don’t have much value in their companies yet to lose. Taking chances are essential and beneficial if the founder wants their business to grow beyond the initial stages.
As the company grows, so does the value — and owners become more conservative fearing greater damage than when it was a smaller business. Owners who are older no longer have the luxury of time to spend years on damage control fixing bad strategies, so they avoid those risky situations that could lose their company.
Business owners should always be looking to exit their investment. Not because the company may be in a bad place but because it is a smart business decision.
3. Time for change
Cal Lai, president and CEO of Recom Technologies (who also is a Cerius advisory board member), points out that owners have many reasons for selling their businesses. Although a chance at liquidity is a good reason for an owner to decide it’s time to sell the business, it may not be the only reason. After dedicating 15 to 20 years of time, energy and resources into building a company, CEOs and founders may find themselves ready for retirement. Or an owner may be ready for some change and seek a new opportunity. That could be motivation enough.
As a serial entrepreneur himself, Lai says, “A good entrepreneur is always looking at their options going forward. Time is always a risk, and the more time your business is out there, the greater risk you have.”
Before you sell
As an owner you have financial goals you are continuously striving for and this applies to selling your business as well. Things to keep in mind when thinking of selling your business are:
Selling a company is not always only about getting the best price. Colleague Murray Rudin, managing director for Riordan, Lewis & Haden, a private equity firm says, “If the firm is entering into a deal in which they are only selling a percentage of their business and will continue to be engaged, then other kinds of factors are equally important as price. These factors include the caliber, the reputation, the references, the culture, the chemistry and the trust of the private equity firm or other types of firm they are going to partner with.”
The mindset of an owner selling their business should not be obsessing over the last few dollars of valuation but rather focused more on the quality of people they will be partnering with as a result of the sale. Rudin argues that this is the biggest mistake business owners make in scenarios where they intend to roll over significant equity. Remember, once the deal is done, you have to work with these people. Make sure they are the right match for you and your company no matter what price they are offering you for a piece of your business.
The final piece of advice: Plan your exit and be ready when the timing is right to pursue your company’s maximum value. Sell it on your terms rather than the market’s terms.
Article Source: entrepreneur.com
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