There’s something in it for everyone. The federal government approved a $2 trillion virus relief package last week called the CARES Act. That stands for “Coronavirus Aid, Relief, and Economic Security.” The legislation is almost 900 pages long so it’s not a quick read, but details are emerging on what’s inside. And, there is help for people in the real estate industry including real estate investors and landlords.
I want to talk about the CARES Act, but first, I’d like to mention another big announcement on Monday, March 30th.
Real Estate as “Essential Business”
The U.S. Department of Homeland Security issued an advisory that said real estate should be considered an essential business. (1) That makes it possible for real estate activity to carry on despite “stay-at-home” orders, which are determined by local governments. California and Washington are among the states that have already defined real estate as essential.
Of course, social distancing guidelines still need to be followed. That includes “no open houses” and the use of virtual tours, whenever possible. Remote transactions and closings are also recommended.
Back to this mammoth stimulus package…
Tax Bonanza for Big-Time Investors
We’ve already been hearing about cash payouts and expanded unemployment benefits that can help tenants pay their rent, along with mortgage forbearance for landlords who come up short. But other provisions in the bill are coming to light including one the New York Times calls a potential bonanza for high-net worth real estate investors. (2)
It’s a provision that would remove the limit on the amount of depreciation that can be used to offset gains from things like real estate sales or the stock market. The depreciation losses were limited in the 2017 tax cut package to the first $500,000 of non-business income for a married couple. If there were additional losses, they could be rolled over to future years. The stimulus package removes that restriction for the current year, and two retroactive years.
Depreciation is calculated according to the cost basis of a rental property along with its “useful life.” For residential real estate, the useful life is 27.5 years. For commercial real estate, it’s 39 years. Each year, a portion of the cost basis is used to calculate depreciation. That can be used against income generated by the property and potentially create a “loss” even though the property is profitable. That loss can then be used against any tax liability for non-business income. Tax experts say, this loophole will only benefit the top one percent of taxpayers, but it’s a pretty big loophole that could wipe out 100% of federal tax obligations for those individuals, and is estimated to cost the federal government $170 billion over ten years.
Coronavirus Emergency Loans
Another part of the CARES act is the “Paycheck Protection Program.” It’s designed to help small businesses remain in operation and keep employees on the payroll with $350 billion in low-interest loans. Those loans can also be forgiven if businesses meet certain criteria. To qualify for this program, small businesses must have fewer than 500 employees. Independent contractors and self-employed individuals also fall into this category.
The details are spelled out in a guide called “Coronavirus Emergency Loans” by the U.S. Chamber of Commerce. (3) In addition to eligibility requirements, it offers some information on what lenders will want to see. Details are still pending for solo operators but the brochure did mention the need for payroll tax filings, 1099-MISC forms, and income and expenses from a sole proprietorship.
As for how much money you can borrow, the Chamber says, loans can be up to two-and-a-half times the borrower’s monthly payroll costs with a $10 million cap. There’s also a long list of things that qualify as payroll costs but with no big surprises. The list includes salaries, wages, sick leave, employee vacations, retirement benefits, and things like that. Payroll taxes and income taxes don’t qualify. The maximum amount you can use for any one employee’s compensation expense is $100,000.
The last part of this program might be the most interesting. Loans may be partially forgiven based on certain expenses during the initial eight-week period. Those expenses include payroll costs, mortgage interest, rent, and utility payments. Since the loan forgiveness is designed to keep employees on the payroll, any reduction in the headcount will reduce the amount of loan forgiveness.
Another provision in the CARES Act will let people take up to $100,000 from their retirement accounts without paying an early withdrawal fee. The distribution must be related to coronavirus financial hardship. Withdrawals also register as income and trigger an income tax event, but in this case, the additional income can be spread across three years.
There’s a detailed summary of all the provisions in the National Law Review. (4)
(1) Residential Real Estate is Essential Business: Inman