2023 Marcum Year-End Tax Guide

THE MARCUM YEAR-END TAX GUIDE 2023 95

Real estate owners and operators are experiencing increased headwinds across all real estate asset classes as they face changes to various tax rules, adjust to the post-COVID real estate market, and deal with the current interest rate environment. In these dynamic times, it remains important to stay current on the latest developments in the industry to make the best decisions as an owner or operator in the field. Interest rates have steadily ESTATE YEAR-END OVERVIEW BY DANI STILLMAN, MELISSA HASENMAYER, RICHARD CASMIRRI NAVIGATING INTEREST RATES, DEPRECIATION, & TAX CHANGES: A REAL

for addbacks of depreciation and amortization expenses. However, those addbacks ended and are still not on the docket to be reinstated for the tax year 2023. Directionally, this is unfavorable for real estate investors since these lower ATI (more real estate ventures are likely to be caught by interest expense limitations). It also reduces the interest expense deduction allowable. This impact was felt in the tax year 2022 and, absent any legislation, will continue during the 2023 tax year. Any unused interest expense can be carried forward to future years, which offers some positive spin to make up for the current year’s tax implication. Some real estate ventures may be able to clear this interest limitation issue by electing to be treated as a Real Property Trade or Business (“RPTOB”), but this also comes at a cost. As a result, electing entities are required to move certain assets to longer depreciable lives (i.e., less

increased since the pandemic (with the average home mortgage rates recently rising to levels not seen over the prior two decades). This has caused disruptions in the real estate industry as borrowers look to secure affordable financing. With this shift, real estate investors have had to recalculate their expected returns and change the decision-making process when moving forward with new deals. Along with interest rate changes, investors have tax impacts to consider: the Tax Cuts and Jobs Act (“TCJA”) has phase-outs and expirations, which will continue to require attention in year-end planning. BUSINESS INTEREST EXPENSE LIMITATION CALCULATION CHANGE REMAINS For tax year 2023, the business interest expense limitation remains at 30% of Adjusted Taxable Income (“ATI”). In 2022 and prior, ATI allowed

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