When Buildings Talk, They Calm Tax-Bill Fears

Simplification is something we can all use, particularly when it comes to deciphering the tax reform bill.

Luke V. McCarthy, president of August Financial Corp., found an unusual approach. He talked to a building.

Don’t be alarmed, he hastens to explain; as an attorney and a certified public accountant, he often does not “see the world as others do.”

McCarthy asked the building, “Have you heard about the tax reform bill?” The building replied, “No--what’s that?”

After learning how Congress made changes in the tax procedures for one and all, and how income and real estate investments will be effected, the building replied:

“I just know why I’m here and what I’m supposed to do.

“I keep myself leased up with long-term tenants. I try to keep in shape.

“I give my owner back around 9% a year in cash on his investment, net of maintenance costs. I produce some depreciation for the investor--about 5% a year.

“I carry a mortgage, so my owner doesn’t have all his money tied up in me, and he gets all the same benefits for a smaller investment.

“And my friends tell me that because of my location, I’m worth 7% or 8% more a year than my owner paid for me. So you see, I don’t really care much about tax reform.”

This chat with the building brought McCarthy back to earth to note that the sky isn’t really falling--on real estate--as widely reported by the media, he said. Bad news, of course, is what no one wants to hear.

McCarthy, whose Long Beach-based firm is affiliated with Glendale Federal, concludes that the structure of partnerships in real estate--the glue that makes them work--remains intact.

Investors can still pool funds and invest through a limited partnership with still no taxes at the partnership level.

“All the operating income after maintenance costs and debt service flows to us, too, just as before. So do the depreciation write-offs, just as before, but in lesser amounts--around 3.3% a year on a commercial structure versus 5.3% before, and 3.6% on a residential building, down from 9%.

“Those are not insignificant changes. They do make a difference. But they are not enough to destroy the value of real estate as a medium of investment.”

The real estate buying public, while not oblivious to the changes in tax procedures, appears to agree with McCarthy and his mythical building. For instance, the strength of the Los Angeles-area market maintains it position--still--as the most active nationwide in both housing and commercial/industrial construction categories.

What’s the best investment now, even for an investment-wise executive?

Michael L. Meyer, managing partner of the Newport Beach office of the Kenneth Leventhal & Co., certified public accountants, provides an appropriate answer.

With changes in capital gains taxes affecting stock and bond investments, and the status of executive benefits and stock option grants--all zinging compensation and investment income--homeownership and its resulting tax deductions move up a notch in importance.

Through the grace and wisdom of most of our elected representatives, full annual mortgage interest and property taxes on first and second homes--those not used partially as rental properties--remain fully deductible.

Meyer says if your home is your castle, it is now also one of your best possible investments.