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How tax reform could impact commercial real estate investments

The passage of tax reform isn't expected to have a huge impact on the commercial side of the real estate sector. However, now that it's clear what tax guidelines will be in place going forward, Ohio investors will be able to formulate a game plan to deal with potential tax issues related to their investments. Tax reform clarification may also ease the hesitation some investors had about proceeding with plans to diversify or enhance a portfolio that includes commercial properties.

Changes to how real estate depreciation, mortgage deductions and carried interest will be handled are minimal since existing rules will largely remain intact. As far as commercial real estate assets go, the elimination of the individual mandate could minimize the need for healthcare providers to add more office space to accommodate increased patient loads since it's predicted that fewer individuals will be insured. Repeal of the personal mandate may also affect demand for senior housing, though these possible trends aren't expected to be significantly impactful.

An increase in standard deductions for married couples and individuals and a cap on property, state and sales tax deductions could reduce the appeal of itemizing such deductions. Consequently, there may be less incentive for first-time homebuyers to invest and an increased demand for apartment properties. A reduction on taxes on pass-through entities may have a bigger impact for commercial investors not already using an LLC or a similar tax structure.

In order to minimize the potential impact of tax changes and maximize investment potential, commercial property owners may want to consult with a real estate law attorney to reevaluate their portfolio and make appropriate adjustments. Possible solutions may include revising an existing business model to properly leverage new mechanisms that will be in place or exploring investment opportunities that may result in higher after-tax yields.

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