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This Election Day will impact everything – including real estate

Posted on November 2, 2020 by Mike Kushner in Blog, Commercial Real Estate No Comments

Another reminder about the importance of the 2020 Presidential Election? Yes, but with good reason. We’ve been inundated with news, ads, and messages forcing very carefully crafted information upon us. There’s a lot we know about each candidate and their platform, but there is much more than we don’t know. This applies to all candidates and political parties. Tomorrow, the nation will vote for the candidate who represents the values and policies that best align with our own. However, I doubt anyone will say they agree 100% with any, one candidate. So instead, we’ll vote based upon the criteria that are most important to our own views. And if this happens to include the creation of new taxes, particularly on real estate, then there is something very important to consider.

Should Joe Biden become the next President of the United States, his plan includes a new probate real estate tax hidden in his platform that could cause a massive hit on capital gains.

Taxing Appreciation

As proposed by Biden, his new probate real estate tax would end the process of real estate heirs taking probated property on a stepped-up basis and instead require them to pay capital gains taxes on all appreciation that accrued on the property before their inheritance. This would put heirs on the hook for paying capital gains taxes on the appreciation of a property, plus any other profits earned above the current market value once the heir sells the asset.

Existing law is much more favorable to those who inherit real estate. For example, if someone purchased a property when it was valued at $100,000 and died when it had reached a fair market value of $1M, the owner’s heirs would inherit the property at a stepped-up basis of $1M. As a result, heirs under current law do not have to pay capital gains on the $900,000 in appreciation that accrued before the original owner’s death, and if they were to sell the property down the road, they would only pay capital gains taxes on any value above $1M.

Biden’s proposed tax changes as a whole would essentially add a fourth tax bracket to the capital gains schedule of 39.6% on income above $1M, meaning the top rate could reach 43.4% when we include the 3.8% net investment income tax.

How This Affects You!

When your parents pass and leave you the family house normally you inherit that property at what it is worth today. If you would sell that house, you would only pay taxes on what it is worth today and what it sells for. If Biden does away with the stepped-up basis you will inherit the property for what your parents paid for the property. If you decide to sell you will pay taxes on the difference between the original purchase price and what it sells for today.

In addition, a Biden presidency would greatly harm multigenerational ranches and farms by killing the next generation with taxes. Simply put, this election stands to drastically change the transfer of generational wealth as we know it.

It’s Not a Done Deal

First, nothing is known until after November 3 and the election results are tallied. Should Biden win, the change is far from a done deal as his plan could change or be voted down by the legislative branch.

Then there are some unknowns in Biden’s proposal, and how those are worked out could make the tax changes less of a blow, or even worse. For one, it’s unclear if death itself becomes a “taxable event” that forces heirs to pay capital gains taxes on all appreciated value at the time of their inheritance. It’s also possible the Biden plan may allow heirs to inherit real estate on a carry-over basis, so they only have to pay for the years of appreciation when they sell the asset, not at the time of inheritance. Another option is that heirs could spread their taxes out over time.

What is known is that if you care about these changes, and stand to be negatively impacted by them, casting a vote is the best way to voice your opinion on the matter. This is not to say any other candidate does not also plan to change other aspects of the tax structure, which will have a negative impact on at least one sector of the population. This is all the more reason to do your research before taking to your polling location.

The Big Takeaway

Regardless of candidate or political affiliation, the thing that matters most is that you cast a vote, and you do so being as well informed as possible. If you have chosen to vote in person, you still have ample time to do your own research and look for reliable sources. And when you do vote, consider what is most important to you and the candidate most likely to uphold this viewpoint when in office.

No matter the outcome – November 3, 2020 will be a historic day for the world!

Central PA Retailer Shares Challenges and Strategies for Competing with Online Retailers

Posted on July 27, 2018 by Mike Kushner in Blog, Local Market No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

In June, the Supreme Court ruled that states can begin to collect sales tax on web purchases. Previously, online sellers who did not have a physical presence (or “nexus”) in a given state had a perceived advantage over sellers that did. This is because these online retailers did not have to collect and remit sales tax back to the state in which the buyer lived. Rather, it was the buyer who was supposed to, at the end of the year, take all the purchases he or she made online that were not collected, calculate the sales tax, tally up the total and remit it to the state at tax time.

If we’re all being honest with ourselves, we know that it’s no stretch to say that this method for collecting sales tax for online purchases was costing states up to $33.9 billion annually in payments that were simply never made. Now that states have been given control to collect sales tax on web purchases, how will this impact our retailers? Moreover, how will this impact the use of and need for commercial retail space?

For insights we went straight to the source. Omni Realty Group interviewed Central PA retailer and owner of World Cup Ski & Cycle in Camp Hill, Pennsylvania, Lee Gonder. Lee is a wealth of knowledge when it comes to running a successful a local retail store and competing against online retailers. Through the questions and answers below, you will gain a better understanding of challenges brick-and-mortar retailers are up against and how the smart ones are developing strategies to provide unique benefits to customers that online retailers simply cannot replicate.

Omni Realty: As a local, brick-and-mortar retailer, how have you been impacted by online retailers?

Lee Gonder: It’s difficult to quantify the impact of online retailers in dollars, but it’s easy to see their effects in day to day business. With online retailing, the consumer no longer has to compromise on their purchase; they will go find exactly what they want. As a small, local retailer it’s impossible to stock, service or even know about every conceivable product within your industry.

In the past, you could explain the choices you made in your inventory and why they were best suited for the local consumer. Most of those educational opportunities are gone with the internet. All research is done online and the retailer is no longer the expert. With the availability of virtually any product online, not only can the consumer research their purchase, but more than likely have a direct link to be able to make the purchase. We’ve been affected on both big ticket items like bikes and skis, but we also take an incremental hit on everything from ski wax to bike chains and other accessories.

Omni: If you had to pick one thing, what would you say is your biggest competition right now?

Lee: Online retailing would have to be our biggest competition right now. In the ski industry, there are a number of domestic companies that do a good job of providing consumers with numerous options for purchase. The ski industry does a reasonable job of requiring its dealers to maintain minimum advertised pricing (MAP). With the current MAP policies it allows my business to compete on price, just bringing inventory choice in as the major obstacle to making a sale.

However, in the bike industry it is quite different. There are numerous international companies that really make competing for the consumer very difficult. The international companies are not governed by the MAP policies that we U.S. retailers are asked to abide by. Therefore, not only can we not compete in the inventory game, but quite often they have pricing that is equal to or sometimes less than my wholesale. Add in two-day free shipping, and there go a lot of my incremental parts and accessory sales.

Omni: Given the recent supreme court ruling to allow states to tax online purchases, do you think this will drive more business back to local brick-and-mortar retailers?

Lee: Simply put, no. Many of the larger online retail services, like Amazon, already have nexus in the state of PA. They already had to collect and remit sales tax. It may help curb the purchasing of some bigger ticket items, but I think the effect will be minimal.

Speaking as a retailer, it will make me rethink how I handle my webpage, which is ecommerce enabled. Now I will have to collect and remit tax to other states if I sell something on my site to an out-of-state consumer. That becomes another hurdle for a small business, to track and remit sales tax to out of state government agencies. I think for a small, local business it may indeed just make things a bit more difficult. The larger companies that have the infrastructure to handle these changes will be able to continue with their online retailing with a few internal adjustments.

Omni: How have you had to adjust your business strategy to compete with online shopping?

Lee: Our focus over the past several years has been to invest in technology or services that can’t be bought on the internet. Precision ski tuning equipment, bike fitting equipment and ski boot fitting equipment and knowledge. Some services can’t be easily addressed online, so we’ve made investments in those areas. We’ve trained the staff to sell that service, use the equipment and that is what sets us apart from the online retailer.

Conclusion

Competing against online retailers is no easy task for our local, brick-and-mortar stores. Though the Supreme Court ruling to allow states to collect sales tax on web purchases was intended to level the playing field for retailers, it’s not exactly an immediate windfall for local retailers.

However, commercial real estate professionals could see a boost in demand for commercial retail space as both conventional and online retailers may put more stock in brick-and-mortar locations since there is no longer an advantage to not having a physical location in each state. In fact, being closer and more accessible to customers will become an even greater advantage for retailers.

For this reason, commercial real estate remains a critical aspect of any retailer’s business strategy. Location, visibility and flow of space has a profound impact on how customers find you and their customer service experience. Retailers who wish to remain competitive against online retailers, or even other brick-and-mortar retailers, should closely consider whether their commercial space is meeting the needs of the business and their customer base.

Through the insights shared in this article, it’s obvious that local retail businesses will continue to face some unique challenges, even after the Supreme Court ruling on online sales tax. Being strategic with the location and type of commercial retail space a business invests in can help deliver exceptional customer service, and in turn earn more business!

Do you agree or disagree that something more should be done to level the playing field between online retailers and local retailers? Share your ideas or ask a question by leaving a comment below!

behavior, brick and mortar, central pa, consumer, customer service, lee gonder, local, Mike Kushner, Omni Realty, online, online sales tax, pennsylvania, retail, retailer, sales tax, shopping, store, supreme court, tax, trends, world cup ski and cycle

Does Your Commercial Real Estate Property Qualify for Section 110 Construction Allowances?

Posted on June 11, 2018 by Mike Kushner in Blog, Commercial Real Estate No Comments

Section 110 of the current Internal Revenue Code (IRC) provides an interesting opportunity for commercial tenants and landlords alike. Essentially Section 110, in certain instances, allows commercial tenants to make improvements to their leased workspace with the benefit of not having to recognize income for any cash payments or rent reductions that are expressly identified in the lease as qualified Section 110 allowances. Additionally, under a qualified Section 110 provision, the landlord will be treated as the owner of the constructed improvements and entitled to depreciation deductions as nonresidential real estate.

The purpose of this tax provision is to provide a set of rules for certain construction allowances, in which the tax reporting and treatment will be consistent between the lessor and lessee. It’s important to understand the nuances of Section 110 that determine whether such improvements qualify. Qualified property is nonresidential real estate which is part of, or present at, “retail space,” which property reverts to the lessor at the termination of the lease. The term of the lease must be 15 years or less, applying certain rules.

For most commercial landlords and their tenants, it can be overwhelming to understand how and when it’s appropriate to take advantage of Section 110. If you find that you’re uncertain as to whether your situation qualifies, don’t let this be the reason you forfeit this potential tax break altogether. When used properly, Section 110 can offer a huge benefit to both parties, allowing tenants to enjoy an upgraded, functional workspace, and allowing landlords the ability to improve their commercial property.

Take a moment to answer these questions to determine if your property might qualify under Section 110. To help us answer, we’ve enlisted the expertise of Jim Holland, Certified Public Accountant (CPA) to offer insight into qualifying for this tax deduction. *It’s important to keep in mind that these are simplified questions and answers. More details may be necessary to fully assess your situation.

Is my space considered “retail?”

If you leased, occupied or use space in your trade of selling tangible personal property (i.e. products or goods) or services to the general public, this is considered retail space. You qualify!

Am I in a short-term lease?

If your lease, with extensions, is not greater than 15 years in length this is considered a short-term lease. You qualify!

Am I constructing qualified long-term real property for use in my trade or business?

If you construct nonresidential improvements (sec 1250 property vs. sec 1245 property) which revert to the lessor (i.e. landlord or person leasing you the space) at termination of the lease, the answer to this question is yes. You qualify! A note of caution: if the lessor chooses to use a cost-segregation study to reallocate the costs, a different language must be used in the lease agreement.

Who will ultimately own the improvements to the property?

To adhere to the requirements under Section 110, your lease must specifically indicate that the lessor retains ownership of all improvements to the property. In this case…you qualify!

Do I have an official agreement between the tenant and landlord?

If you have obtained a signed agreement, before payment or before the reduction in rent begins, from the lessor to lessee…you qualify!

Will the allowance be expended in the tax year it is received?

If the full amount of your construction allowance is expended within 8 and 1/2 months after the close of the tax year…you qualify!

Will both the landlord and the tenant disclose this information with their tax returns?

In order to fulfill this requirement, you must disclose both the landlord and tenants names, addresses, employer IDs, location, and amount reported on both lessee and lessor tax returns. In doing so…you qualify!

Does the Safe-Harbor Exclusion apply?

If you have met all of the above requirements, the safe-harbor exclusion applies to your situation. You qualify!

As you can see, Section 110 provides a valuable opportunity for commercial tenants and landlords to improve their spaces while each receiving a benefit for doing so. If you meet the requirements, and it makes sense for your situation, taking advantage of the Section 110 tax breaks could open up new possibilities to create the commercial space you’ve dream about having! The most important thing to keep in mind is that you must be aware of the requirements to qualify under Section 110 in order to receive the maximum benefit. Speak to a professional advisor before entering any contract or commitment.

*General Disclaimer: These are simplified answers and your situation may be more complicated. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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Impact of the New Tax Law on Commercial Real Estate

Posted on February 12, 2018 by Mike Kushner in Blog, Commercial Real Estate No Comments

The federal tax overhaul, which was enacted into law on December 22, 2017, was the most drastic tax law changes that the United States has seen in 30 years. While it will take some time to fully understand how much tax savings the changes could generate for commercial real estate investors, there are several significant impacts that are quite apparent.

New tax climate favors commercial real estate investors

Legal and tax experts agree that the new tax law bestows several benefits that make it more appealing for commercial real estate investors to buy properties. Many of the changes will put more money back into the pocket of investors in terms of tax savings. Some of the changes, particularly the tax treatment of capital expenditures, will shield a tremendous amount of income for property owners that are making capital investments and improvements to their properties. And let’s not overlook the ripple effect the new tax bill may create, such as fueling economic and job growth that will drive demand for commercial real estate. All things considered, real estate has become just about the most accessible way for high net-worth investors to profit from the tax law.

A shift in capital should increase demand for commercial properties

The tax new law creates an incentive for investors to shift capital from equities to pass-through businesses. Essentially, the law enables a taxpayer to factor 2.5 percent of the original purchase price of a property into the calculation of the 20 percent deduction for pass-through income. This allows a real estate investor the ability to reduce real estate investments to an effective 29.6 percent tax rate, which is 10 points lower than it was in 2017. Without the predicted shift in capital based on the tax new law, commercial real estate prices likely would have stalled in 2018, due to increasing interest rates and decreasing cap rates. It’s important to note that the deduction is set to expire in December 2025.

Expansion of Section 179 allows commercial property owners to direct expense improvements

Another positive for commercial real estate investors is the expansion of the Section 179 deduction for depreciation. Under the Section 179 revision, the new tax law lets commercial property owners count the cost of improvements (i.e. roofs, HVAC systems and security systems) as direct expenses in the year these items were installed. Under the previous tax law, improvements had to be capitalized with a small piece being expensed each year until the full cost was exhausted. Additionally, the Section 179 change is retroactive to the 2017 tax year, which is unlike other parts of the new law.

Tax-free 1031 swaps for real estate were retained

Another piece of the tax law that should have commercial real estate investors excited is the retention of tax-free 1031 swaps for real estate. The real victory here is that lawmakers did not yank 1031-exchanges for real estate, as they did for aircraft and other types of personal property. In fact, under the new law 1031 trades are now restricted exclusively to real estate.

Insights from a tax adviser

The new tax law creates some gray areas and leaves many questions unanswered, particularly as it relates to commercial real estate. As a commercial real estate investor, the best thing you can do is consult a tax adviser before making any drastic changes to your real estate investment strategies. At Omni Realty Group, we had a few questions of our own so we asked Jim Holland, accountant and owner of Jim Holland CPA to weigh in with his insight. Here is what he shared.

“There is no doubt the biggest winner in the real estate arena was for commercial real estate investors; however, it is wise to proceed with caution. I would recommend to any commercial real estate investor that they tread lightly until more is known about calculating the 20% reduction of business income, including from flow through entities. The calculation can be complicated and burdensome.”

That’s not to say there are some immediate actions CRE investors might consider taking in 2018 to put themselves in the best possible position to maximize the benefits of the new tax law. Clifton Guise, Tax Attorney and Partner at Halbruner, Hatch & Guise, LLP shares the following.

“Because most real estate investors own and operate their real estate activities through pass-through entities (LLCs, LPs, and S-Corps) or sole proprietorships, it is important to determine if the investor qualifies for the Qualified Business Income (“QBI”) Deduction. The QBI Deduction is an individual level deduction that can reduce the tax rate on income from pass-through entities. An investor may need to restructure their entity or in some cases restructure their leases in order to qualify for the QBI Deduction.”

Taking the time to fully understand the new tax law, and identifying how you may need to restructure your leases or business model to maximize your benefits under this law is a worthy investment of your time. If you are a commercial real estate investor, make it a goal to seek advice on the new tax law and how it stands to impact your business going forward.

Share your opinion! What do you think is the most important impact the new tax law will have on commercial real estate?

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