On March 27, 2020, the CARES Act was signed as a response to the coronavirus crisis. This law can be very influential. This article dives into the sections of the CARES Act that are most relevant and impactful for commercial real estate investors and those involved in syndications.
We created a special report summarizing the recent legislation. You can access it here.
We created a free Slack group, the Cash Flow Community, for real estate investors to brainstorm solutions. You can join the group here.
Increased Interest Expenses for Businesses
The 2017 TCJA limited business interest to 30% of adjusted taxable income for taxpayers. The Act has increased this limitation to 50% of taxable income for 2019 and 2020.
Planning considerations for real estate investors: Most individual investors will not be impacted by this, however syndicate and fund sponsors need to take note.
The business interest limitations are described in IRC Sec 163(j) and they apply to all businesses with $25MM or more in gross receipts, except for tax shelters. Tax shelters under IRC Sec 461(i)(3)(B) includes any syndicate under IRC Sec 1256(e)(3)(B) which is defined as a partners or other entity, including S-Corporations, where more than 35% of its losses are allocable to limited partners or limited entrepreneurs.
If you run a syndicate or fund and your entity produces losses and more than 35% of those losses are allocated to limited partners, you’re running a tax shelter and you’re subject to Sec 163(j).
Many sponsors elected out of the business interest limitations as an electing real property trade or business. This requires that you depreciate real property on the ADS system (a longer recovery schedule).
The decision to elect out now requires a bit more analysis as the limit on your business interest deduction has risen from 30% of taxable income to 50%. Get with your advisor now.
Technical Amendment for Qualified Improvement Property
The 2017 TCJA left commercial property owners in a bad spot. All other property owners were celebrating IRC Sec 168(k)’s new 100% bonus depreciation clause for all improvements with a useful life of less than 20 years. Qualified Improvement Property (QIP) was intended to have a 15-year life and qualify for 100% bonus depreciation, however the final bill left QIP with a 39 year life and disqualified QIP for 100% bonus depreciation.
QIP is generally defined as any improvement made to the interior portion of a nonresidential building after the building was placed in service.
The Act makes a technical correction including QIP as eligible property for 100% bonus depreciation.
Planning considerations for real estate investors: if you had QIP in 2018 or in 2019, get with your advisors now to determine how you need to fix previously filed returns to 100% bonus depreciate the QIP and claim a refund. You may be able to make a late election described in Rev. Proc. 2019-33 by either filing an amended 2018 tax return or a Form 3115 and 481(a) adjustment on your 2019 or 2020 tax return.
Temporary Moratorium on Eviction Filings
During a 120 day period beginning on the date the Act is signed into law, the landlord may not initiate legal action to recover possession of the property from the tenant for nonpayment of rent or other fees or charges. The landlord may also not charge fees, penalties, or other charges to the tenant related to the nonpayment of rent.
Additionally, the landlord may not require the tenant to vacate the unit before the data that is 30 days after the date on which the landlord provides the tenant with a notice to vacate. The landlord may not issue a notice to vacate until the 120 day period, after the Act has been signed into law, has passed.
Forbearance of Residential Mortgage Loan Payments for Multi-Family Operators
During the covered period, a multi-family borrower that was current on payments through February 1, 2020 with a Federally backed multi-family mortgage loan experiencing a financial hardship due directly or indirectly to the COVID-19 pandemic may request a forbearance.
The forbearance request can be written or oral and must document the financial hardship resulting from COVID-19. The loan servicer may provide forbearance for 30-days and extend the forbearance period for up to two additional 30-day periods upon request of the borrower provided that the borrower’s request for extension is made at least 15 days prior to the end of the forbearance period.
Renters are protected during the forbearance period for multi-family operators who request forbearance. This means that operators who are on forbearance cannot evict or initiate eviction of tenants for nonpayment of rent or other fees nor can the operator charge the tenant with late fees or other penalties as a result of nonpayment of rent.