CRE Investing, the Tax Cuts and Jobs Act — and You

Is your tax strategy on par with your investment strategy?

The truth is that if you want to get the most out of your investments, you need to consider the tax implications. And there’s no better way to illustrate this than with the Tax Cuts and Jobs Act (TCJA, or the Act), which was introduced on November 2, 2017.

The Tax Cuts and Jobs Act
At its most basic, the Tax Cuts and Jobs Act allows you to hyper-depreciate assets that have a depreciative life of fewer than 20 years. For example, if you own a manufacturing company and you purchase a new machine, you can write it off as a loss against your income for the year you bought it instead of depreciating it over time. That means you don’t pay taxes on the money you spent on the machine until you sell it and recapture the value of the asset on the sale.

This opens up a whole new window of opportunity for commercial real estate investors. Why? Well, a property consists of multiple elements:

  • The land, which never depreciates
  • The building itself, which has a useful life of more than 30 years
  • The roof, windows, security system, and all other components that have a useful life of fewer than 20 years

Now, if you do a cost-segregation analysis of a real estate asset, you can write off the amount of capital invested in those elements that have a depreciative life of fewer than 20 years.

This becomes really interesting when you buy assets with leverage. Let’s say you purchase an asset for $100. If you put $75 leverage on it, you’ll have to put $25 equity into it. A cost-segregation analysis identifies that $20 of the $100 can be written off. On a cash basis, if you’re at a 40 percent marginal tax rate, that amounts to $8, making your equity investment $17—not $25.

Moreover, if you can carry the investment and push off recapture, you’re not only reducing your risk on the investment—you’re also gaining more value from it. In fact, with this model, even if you were to lose the entire investment, you’d still make six percent, which is equal to the average pension-fund return over the last 10 years. Imagine what the returns are if you successfully manage the asset and reinvest the passive income it generates!

 

Tax Strategy Meets Investment Strategy With Marcus Investments: 1+1=3

To win a tournament, a professional golfer has to combine a strategy to outplay his or her opponents with a strategy that takes the course into account. Similarly, you need to combine your investment strategy with your tax strategy to make both more valuable. At Marcus Investments, we know the course, we know the challenges, we know the opportunities—and we think about these factors in detail to find the best way for you to maximize your ROI.

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