Late 2020 saw the enactment of a massive new federal spending law. Much of the media attention focused on the relief related to COVID-19. Still, the Consolidated Appropriations Act (CAA) also includes some tax-related provisions of particular interest to real estate owners and developers. Here are some tax law changes you should know about.
1. The Low-Income Housing Tax Credit
The CAA may make some low-income housing projects more viable. It establishes a minimum 4% rate for computing credits related to projects acquired for rehabilitation or funded using tax-exempt bonds. The rate is effective for eligible property placed in service after December 31, 2020.
The law also expands the credit for states with qualified disaster zones. It increases the allocations in disaster-struck states to $3.50 multiplied by the number of residents in the disaster zones, capped at 65% of the state’s 2020 allocation.
2. Depreciation of residential rental property
The Tax Cuts and Jobs Act (TCJA) allows real property businesses to elect out of the business interest deduction limit — but such businesses must apply the alternative depreciation system (ADS) to residential property. The TCJA also reduced the ADS recovery period from 40 years to 30 years for residential rental property placed in service by the taxpayer after December 31, 2017.
The CAA assigns a 30-year depreciation period to all residential rental property held by electing real property businesses if it wasn’t subject to the ADS before January 1, 2018. This opens up the business interest election to businesses that may have opted out to avoid the 40-year recovery period.
3. Empowerment Zones
An Empowerment Zone (EZ) is a designated area of high poverty and unemployment that benefits from tax incentives provided to businesses within its boundaries. Businesses located within such zones are eligible to receive certain tax incentives, including a 20% wage credit on up to the first $15,000 of wages paid to specific employees. In addition, the CAA extends EZ designations through 2025.
But it’s not all good news for EZs. The CAA also terminates the enhanced expensing rules and deferral of capital gains tax on the sale and timely replacement of EZ investments for property placed in service in tax years beginning after December 31, 2020.
And that’s not all
The CAA contains multitudes of other provisions that could affect businesses, whether in real estate or not. We can help you make the most of the changes to minimize your tax liability and maximize your bottom line.