The last two columns (Feb. 21, 2018 and April 17, 2018) discussed changes affecting real estate including the pass-through business deduction adopted in new Section 199A of the Tax Cuts and Jobs Act (Tax Act) and the workings of the pass-through business deduction. Pub. L. No. 115-97 (enacted December 22, 2017). This column will review the limitation on the deductibility of interest and its application to real estate.

Summary of the Limitation

The Tax Act establishes a limit on the deductibility of net business interest expense equal to 30 percent of an amount that is similar to earnings before interest, taxes, depreciation and amortization (EBITDA) for taxable years 2018 through 2021, and similar to earnings before interest and taxes (EBIT) for taxable years 2022 and thereafter. I.R.C. Section 163(j). In both cases, the Tax Act permits the indefinite carryforward of any disallowed interest expense. The Tax Act does not provide any grandfather provision for outstanding debt; the interest deduction limitation applies to all interest that is paid or accrued on and after Jan. 1, 2018. The limitation on deductibility of interest effectively places a cap on the amount of debt in a capital structure of an entity.