The Tax Cuts and Jobs Act (TCJA) is now law and will impact how real estate investment trusts (REITs) will make future business decisions. Below are some of the primary considerations REITs should keep in mind as they navigate the new tax rules.
In general, under the TCJA, REITs will not be able to deduct interest expense in excess of 30 percent of adjusted taxable income. Adjusted taxable income is the REIT’s taxable income computed without regard to business interest expense, business interest income, net operating losses, depreciation, amortization and, presumably, the dividends paid deduction (although additional guidance is needed to confirm the dividends paid deduction is in fact a deduction for purposes of this calculation). REITs can elect out of this limitation; however, the trade-off is that they must use the Alternative Depreciation System (ADS) which has a longer depreciable life compared to regular Modified Accelerated Cost Recovery System (MACRS) depreciation. Additionally, REITs would not be eligible for bonus depreciation for qualified improvement property (QIP).
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