CARES Act Provides Relief to Real Estate Professionals
The CARES Act, signed into law on March 27, 2020, provides, relief from certain tax provisions enacted by the 2017 Tax Cuts and Jobs Act (TCJA) which may help real estate businesses weather the current economic storm. Below is a brief overview of some of the tax relief provisions affecting real estate businesses:
Temporary Repeal of Net Operating Loss (NOL) Limitations and Modification of Carryback Rules: Under the TCJA, NOL losses could be carried forward but not back to earlier years. Moreover, the deductible amount was limited to 80% of taxable income. The CARES Act temporarily suspends those limitations for tax years 2018, 2019, and 2020, and allows for NOLs to fully offset prior year income for the preceding five years. This modification provides significant opportunities for businesses to strategize and, potentially, receive refunds. For example, a restaurant that sustains losses in 2020, but had earlier profitable years may, ultimately, carryback its 2020 NOL to prior gain years and obtain a refund of previously paid income taxes. Similarly, a company that sustained losses in 2018, but had a good year in 2017, should review its tax returns to see if it is currently eligible for a refund.
Increased Business Interest Expense Deduction: Under the CARES Act, the limitation on the deductibility of interest expense under IRC Section 163(j)(1) of the TCJA is temporarily and retroactively increased from generally 30% of adjusted taxable income to 50% of adjusted taxable income for tax years beginning in 2019 and 2020. The change will provide tax benefits for businesses taking on additional debt during the crisis by increasing deductions and potentially creating additional NOLs, which may now be carried back to prior tax years. However, for partners and partnerships, there is a special variation of this new rule.
100% Bonus Depreciation - Expanded Definition for Qualified Improvement Property (“Retail Glitch”): The CARES Act also expands the definition of qualified improvement property to include nonresidential rental property and retroactively allows businesses to use that expanded definition back to tax year 2018. This means that businesses engaged in leasing commercial rental property can deduct 100% of improvement costs versus depreciating over 39 years. Practically speaking, taxpayers who made qualified improvements to nonresidential rental property in tax year 2018 but were unable to fully expense their costs, are entitled to file an amended 2018 return to retroactively obtain this benefit.
Increased Allowance of Excess Businesses Losses for Noncorporate Taxpayers: Under the TCJA, Section 461(l) non-corporate taxpayers (e.g. individuals, trusts, estates) were limited in their ability to deduct excess business losses to the amount of gain plus $250,000. The CARES Act delays the application Section 461(l) to tax year 2021, and, thus, permits the deduction of excess business losses for 2018, 2019, and 2020 tax years. With the filing of amended returns, the increased excess business losses could be extremely beneficial for active real estate professionals previously subject to the 2018 and 2019 limits. However, this new provision does not amend the passive loss and at-risk limitation rules and may not be as beneficial for passive investors.
Evictions and Foreclosures: Sections 4022 through 4024 of the CARES Act deal with mortgages and foreclosures, including eviction moratoriums and mortgage forbearance. For borrowers of federally backed mortgages, Section 4022 outlines a process that allows individuals to request forbearance regardless of delinquency status. To do so, borrowers must submit a request to their loan servicer and, if accepted, their forbearance would last for up to 180 days. If needed, a borrower can request that the forbearance can be extended for an additional period of up to 180 days. Importantly, no fees, penalties, or interest beyond the amount of the contractual payments can accrue during the time of the forbearance. Specifically concerning evictions, for properties that are part of government programs or that have a federally backed mortgage loan, Section 4024 creates a 120-day moratorium on evictions.
Department of Housing and Urban Development (HUD): Under the CARES Act, $5 billion is allotted to grow the Community Development Block Grants program, while an additional $4 billion is earmarked for McKinney-Vento Homeless Emergency Solutions Grants. Concerning assistance for the Section 8 voucher program, $1.25 billion has been allotted under the Act to support individuals who will be suffering a loss of income due to COVID-19 related issues, and $1 billion has been designated for the Project-Based Rental Assistance Program. Finally, the Act provides for $50 million of assistance for the Section 202 Supportive Housing for the Elderly Program.