Estate Bedroom Sets
As with many comprehensive pieces of legislation written during moments of crisis, it will take some time to unpack every last element of the 880-page, $2 trillion Coronavirus stimulus bill passed by the House and Senate. Members of congress on both sides of the aisle are surely relieved that their constituents are at least getting some relief, but one provision slipped into the bill will effectively change tax policy to benefit the country's wealthiest real estate investors.
According to The New York Times, Senate Republicans added a provision to the $2 trillion stimulus bill that revises the tax code to effectively remove the cap on tax savings generated by losses stemming from the depreciation of real estate. This is a reversal of course from Trump's 2017 tax cuts, which capped the amount of these "losses" that a married couple could use to wipe out their tax obligation from capital gains or non-business income at $500,000.
Become an AD PRO Member
Buy now for unlimited access and all of the benefits that only members get to experience.
So how does depreciation work? Effectively, the IRS considers real estate an individual or corporation owns and uses as a rental property to have a "useful life" of either 27.5 years for residential use or 39 years for commercial use. For each tax year over a property's life span, part of its "cost basis" can be deducted, reducing the taxable income on the property. In many cases, depreciation can help transform a property's income after expenses into a loss even though it's functionally profitable. In the case of wealthy property owners, that "loss" can then be rolled over to lower the tax liability from other forms of (non-business) income.
Under the pre-stimulus tax code, a tax filer would roll over any loss from depreciation above the $500,000 cap into a future tax year. Instead, the repeal of this restriction for the 2018, 2019, and 2020 tax years allows real estate tycoons to potentially wipe out most or even all of their federal income tax obligations. Internal Revenue Service data suggests that only the top one percent of taxpayers will realize any savings from this real estate depreciation loophole. The Times further notes that this giveaway could ultimately reduce federal tax revenue by $170 billion over a ten-year period. For context, that's $70 billion more than what hospitals on the front lines of the COVID-19 crisis are getting from the $2 trillion stimulus.
The increasingly widespread moratorium on non-essential construction (which now includes New York City) probably isn't welcome news for high-powered real estate investors in 2020, but it doesn't affect much vis-a-vis the newly-changed tax code. If stalled construction affects when in the year a real estate investor takes ownership of a rental property, it changes how much of its cost basis can be depreciated on a 2020 tax return. However, that was already the case.
AD PRO is currently offering free access to all news stories about the coronavirus outbreak.
Source: https://www.architecturaldigest.com/story/real-estate-investors-are-set-to-benefit-from-the-stimulus-bill
