Key Tax Considerations for Real Estate Investors in 2024

Amid the backdrop of market realignment, higher interest rates, and shifting workplace habits, investors remain cautiously optimistic about their real estate allocations heading into 2024.

After an overall slower acquisition pace in 2023, market uncertainties prompted investors to adopt a wait-and-see approach, hoping for property values and interest rates to reconcile. However, for those looking to incorporate real estate into their portfolio in a more tax-efficient way, Real Estate Investment Trusts (REITs) can provide valuable opportunities. To learn more, check out our blog on Understanding REITs: A Guide to Tax-Efficient Real Estate Investing. Those who returned profitability in their real estate deals last year did so by strategically leveraging available incentives. Tax credits, opportunity zone programs, energy credits, municipal grants, and Tax Increment Financing (TIF) subsidies were a boon to their bottom line, helping to mitigate the impact of broader market pressures.

As the real estate market works to reset in 2024, we believe opportunity lies in tax optimization strategies, sustainability, and technological innovation. Following, we’ll cover key tax legislation under consideration and opportunities for investors to strategically position their real estate investments.

Current and Proposed State of Cost Recovery

The constant undercurrent of shifting tax regulations requires investors to stay informed and adapt strategies accordingly.

In a welcomed bipartisan vote, the House passed the Tax Relief for American Workers and Families Act on Jan. 31, 2024, and it currently sits in the Senate awaiting further action. Should the bill become law, it will reinstate several business-friendly provisions that had previously expired.

Outlined below are the highlights on the current and proposed state of cost recovery.

Bonus Depreciation

In a similar effort, proposed legislation seeks to reinstate 100% bonus depreciation for new and used qualifying property, retroactively applying full expensing for capital assets placed in service starting in 2023 and extending it through the end of 2025, when most provisions born out of the Tax Cuts and Jobs Act (TCJA) expire.

Currently, companies can only deduct 60 percent of qualifying property placed in service before the end of 2024. Unless the bill makes its way through Congress, the allowable deduction will continue to be reduced by 20 percent each year until completely phased out on Jan. 1, 2027.

While the proposed tax bill is a step in the right direction, more permanent improvements to cost recovery would fuel significant economic growth over the long term. However, reinstating temporary policy sacrifices the opportunity for sustained growth.

Net Interest Limitation - Section 163(j)

The proposed legislation also aims to provide businesses with a more favorable calculation of adjusted taxable income (ATI) for the limit on interest deductions under Section 163(j). The bill would retroactively restore a business’s ability to deduct interest expense of up to 30 percent ATI using the EBITDA calculation (earnings before interest, taxes, depreciation, and amortization) for tax years 2024 and 2025, with an election to use it for tax years 2022 and 2023.

Since 2022, current law requires businesses to calculate ATI using EBIT (earnings after the deduction for depreciation and amortization), which generally lowers ATI and triggers the limit sooner.

Creating Value through Sustainability

Opportunities continue to emerge in sustainability, a key driver of value creation for real estate stakeholders. By capitalizing on these tailwinds and implementing sustainable initiatives, investors stand to benefit from reduced operating expenses, increased competitive advantage, higher property valuation, and attractive tax incentives.

Energy-Related Tax Credits

In an effort to accelerate the use of clean energy and sustainable living, the Inflation Reduction Act of 2022 (the Act) implemented widespread incentives to encourage taxpayers to invest in energy-efficient home improvement projects. Within the scope of the Act, the expanded Section 45L tax credit rewards developers of energy-efficient homes by providing a wide-range of tax savings for builders of qualified projects.

Eligible contractors of single family and multifamily residences can receive between $500 and $5,000 in tax credits for homes sold or leased on or after Jan. 1, 2023, through Dec. 31, 2032. To receive the maximum credit amount of $5,000 per dwelling unit, contractors must now comply with strict criteria, including 1) Energy Star requirements 2) Zero Energy Ready Home (ZERH) requirements, and 3) prevailing wage requirements for multifamily dwelling units.

These new energy-efficient credits greatly incentivize green building in real estate, encouraging investors to dive deeper into more sustainable development.

Stay Informed with R&A CPAs

As the real estate market realigns and tax legislation makes its way through Congress, stay informed of planning opportunities and effective tax strategies to optimize your investments, and avoid costly oversights.

Visit www.randacpas.com for more insights or call our office at (520) 881-4900 to speak with an expert in the firm’s real estate practice.