The CARES Act relief package, taxes, and real estate investors

The COVID relief package, taxes, and real estate investors
by Brad Cartier, posted in Legal & Taxes

At the end of December 2020, former President Trump signed into law the latest set of stimulus; aimed to extend the COVID-19 pandemic and economic relief efforts. This was an extension of the CARES Act signed in March. The spending in this bill equates to $2.3 trillion in relief and government funding and extended billions in aid to the unemployed.

For real estate investors, there were significant implications, from rental assistance to unemployment benefits. Here’s an overview of the key takeaways for investors from the extension of the CARES Act, and how to think about this massive government stimulus as 2021 gets underway.

Tax provisions

There were several important takeaways from the new measures. First, the bill issued a permanent 4% Low-Income Housing Tax Credit (LIHTC). The LIHTC is a tax incentive for the construction or rehabilitation of affordable rental housing for low-income families.

The bill provided a 5-year extension of the New Markets Tax Credit (NMTC). The NMTC is similar to the above, in that it is an incentive for investment in low-income communities. In turn, investors in these neighbourhoods receive a tax credit against their federal tax.

Finally, there were also changes to depreciation schedules for rental real estate. According to Ernst & Young:

The Consolidated Appropriations Act, 2021 (Act), passed by Congress on December 21, 2020, changes the provisions in the Tax Cuts and Jobs Act (TCJA) regarding certain electing real property trades or businesses (RPTOBs) by applying the 30-year alternative depreciation system (ADS) recovery period to all residential rental real estate, including property placed in service before 2018.

Evictions

As part of the new bill, the eviction moratorium was extended through to January 31, 2021. According to the Congressional Research Service: “The CARES Act eviction moratorium applied to federally related properties, which the act defined as properties participating in federal assistance programs or with federally backed financing. Researchers estimate the CARES Act eviction moratorium applied to between 28% and 46% of occupied rental units nationally.”

As there may be some state-specific eviction guidelines, continue to check with your legal team and state governments for updates on evictions.

Rents and payments

In the new spending bill, $25 billion was earmarked for rental relief. This is to be used for future rent, utility payments, and back rent owed. Renters require a household income of 80% or below the area median income. Further, at least one tenant has to have qualified for unemployment benefits or lost their job.

There will also be additional stimulus payments of up to $1,200 per adult for individuals whose income was less than $99,000 as well as $500 per child under 17 years old.

Deductions

You will now be able to deduct 100% of your business meal expenses incurred in 2021 and 2022. Normally, in most cases these deductions are 50%. This will help some real estate investors, and is aimed at helping the restaurant industry bounce back from the pandemic and associated lockdowns.

Final thoughts

With renters being given more financial and unemployment support, real estate investors may get some reprieve from late or non-payments. You should be aware of these new provisions, and educate your tenants about what it means for them.