Real Estate Watch

Commercial & Investment

REAL ESTATE

855.234.8089 | www.NorthBayProp.com

Published by North Bay Property Advisors, Santa Rosa CA

VOLUME 1 | APRIL 2018

27821 Dutcher Creek Rd. Cloverdale

Real estate and the new tax law

20.04 acres

By Rick Torkelson, CPA and partner of Torkelson & Associates, CPAs, LLP in Petaluma, CA

HOT PROPERTIES

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FOR SALE 27821 Dutcher Creek Rd. Cloverdale, CA Approved CUP-Medical Cannabis Cultivation 2150 Bluebell Dr. Santa Rosa

FOR LEASE 1330 N Dutton Santa Rosa, CA 52 & 56 Mission Circle Mission Plaza Santa Rosa, CA 977-995 Sebastopol Rd. Santa Rosa, Ca. 58 W North St. Healdsburg, CA

FOR SALE OR LEASE 15875 Dam Road Ext. Clearlake, CA 95422

O

n December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” aka “TCJA”.

This legislation reflects the largest major tax reform in over three decades.

The change showing lots of interest is the new Deduction for Qualified Business Income of “Passthrough” entities. There are many rules, definitions and phase-outs that complicate this new IRC §199A, but basically, beginning in 2018, it allows a new deduction of up to 20% of a taxpayer’s domestic “qualified business income.” I will discuss this new tax law as it pertains to real estate rental.

Qualified business income may include all kinds of business income including income from services, but important here is that it includes income from rental real estate. Owners of rental real estate will treat net rental income shown on Schedule E as qualified business income (i.e. income after depreciation).

It does not include W-2 income — even if the W-2 income is from a pass-through entity owned in whole or in part by the taxpayer. Nor is this new deduction available to partner’s guaranteed payments or to C corporations.

The deduction applies to sole proprietorships and passthrough income received by individuals from partnerships (including publicly-traded partnerships), S corporations, trusts and estates, as well as real estate investment trusts and qualified cooperatives. Again, this deduction applies to income from rental real estate most commonly reported on a taxpayer’s rental schedule E. The deduction is limited to 20% of the lesser of: n Net qualified business income —OR— n Taxable income before the deduction and after reduction for any net capital gains.

The deduction may be phased down based on taxable income computed without regard to the IRC §199A deduction. The phase-out ranges are: n Married filing joint: $315,000 – $415,000 and n All other filing statuses: $157,500 – $207,500

Exceeding the phase-out levels for business income other than certain service businesses will not necessarily cause the taxpayer to lose the deduction. Instead, it will allow a deduction subject to other limitations.

If you are fortunate enough to exceed the phase-out ranges listed above, the new tax law may still allow a deduction subject to other limitations. The deduction looks at W-2 wages paid to employees and to the unadjusted basis of depreciable property held by the business (again, business includes rental real estate).

For these higher-income taxpayers, the deduction is limited to the greater of:

This new provision to the tax code is likely to lower the taxable income of any real estate owner that has income from a real estate investment.

n 50% of the W-2 wages paid by the business —OR—

n The sum of: ● 2 5% of W-2 wages paid by the business —PLUS—

● 2 .5% of the unadjusted basis immediately after acquisition of depreciable property.

Couple of comments— qualifying depreciable property can’t be past its last full year of depreciation. For example, 39-year property can be counted for 39 years after placed in service while 5-year property can be counted for up to 10 years. Also, wages would include wages paid to owners of the entity.

“Simplification” — just like they said but simple or not, this new provision to the tax code is likely to lower the taxable income of any real estate owner that has income from a real estate investment.

FOR SALE: AUTOZONE ANCHORED, MULTI-TENANT RETAIL CENTER

PERFECT 1031 EXCHANGE PROPERTY! 6595 Commerce Blvd, Rohnert Park | 35,486 +/- sf n PROVEN LOCATION WITH EXTENSIVE PROPERTY UPGRADES n FREEWAY VISIBILITY n EXCELLENT TENANTS — PROVEN RETAIL CONCEPTS

AutoZone anchored, 100% leased, multi-tenant neighborhood retail center, located in the heart of Sonoma County. Long-term tenants with proven track record.

The property is well located at the high-traffic intersection and dense retail market of Highway 101 and Rohnert Park Expressway. The property fronts Commerce Blvd. which is a major north/south arterial feeding in and out of the residential neighborhood.

RETAIL FOR SALE

OFFICE FOR SALE

119 North St., Healdsburg | 9,750 +/- sf

2544 Cleveland Ave., Santa Rosa | 14,366 +/- sf

Here’s a rare opportunity for retail, office, hospitality or residential usage just one block off of Healdsburg Plaza. The ground floor features 10-foot ceilings and is move-in ready with contemporary finishes. The upper level has even taller ceilings, both stair and elevator access, includes several offices as well as unfinished storage space.

This modern, central Santa Rosa building is ideally suited to law practices, insurance agents and other professionals needing access to nearby County courts and offices. Property includes modern décor, on-site parking, elevators, and ADA restrooms on both levels. The building has timed key card access and property management.

FOR SALE OR LEASE, TWO BUILDINGS: OFFICE / RETAIL / INDUSTRIAL Owner/User opportunity with great cash on cash return. One or both buildings available for sale with approved lot split ready for recording.

5810/5830 Commerce Blvd, Rohnert Park | 9,800-19,600 +/- sf 2 Real Estate Watch

APRIL 2018

Front building offers great visibility onto US Hwy 101 and could be modified to flex space. Each building is two story, approximately 9,800+/- sq. ft. with abundant parking and separately metered. © North Bay Property Advisors | NorthBayProp.com

Santa Rosa Rent Control and Just Cause Eviction Update

By Rick Torkelson, CPA and partner of Torkelson & Associates, CPAs, LLP in Petaluma, CA

J

ust a few months before fires ravaged our community and so many lost their homes, the Rent Control and Just Cause eviction debate was in full swing.

In August 2016 the city council passed Rent Control with Just Cause eviction into law. It was then fought against and defeated on the ballot in June 2017.

Post-fire, the local focus seems to have shifted to price gouging in the rental market, and though rent control may not be gaining much traction at this time, you can bet it will surface again. The most recent movement has been at the state level, with the attempted repeal of the Costa-Hawkins Rental Housing Act. The Costa-Hawkins Rental Housing Act prescribes statewide limits on the application of local rent control with regard to certain properties. It exempts properties like single family homes, condo-

“ With the lack of construction in the community, in the last 20 years, to keep up with the housing needs; it’s no wonder there is a shortage of rentals...”

—Ross Liscum, Century 21 Alliance minium and new construction from price controls. In February of 2017, AB 1506, was introduced to repeal that act. The bill was given its first public hearing on January 11, 2018, where approximately 1,000 people showed up to voice their opinions. The vote was one shy of what was needed to go forward, and the bill to repeal Costa-Hawkins, is currently dead in the water.

Let’s back up a minute and take a brief look into the problems surrounding Rent Control and Just Cause eviction.

The problem:

Concerns surrounding rent control come from both sides. As repair, maintenance and property taxes rise, responsible landlords, trying to keep rents as stable as possible for their good tenants will find it more difficult to make a profit. For renters, at lease renewal time, a large increase can send them looking for other options, which often include staying with friends or family. Just Cause eviction is thought of by tenants as a protection from eviction without cause, but can create a lot of red tape for landlords needing to evict bad tenants. Many, if not most landlords and property managers, will increase the qualifying criteria for incoming applicants. Fewer and fewer landlords and property managers will be able to rent their units to marginal credit tenants.

The debate locally:

In a statement from Ross Liscum, of Century 21 Alliance: “We are a free market society. We have a lot of

© North Bay Property Advisors | NorthBayProp.com

husbands and wives that have rental properties that they have had for a long time. They live here, work here and are active in the community. All they want is to be able to maintain their rental properties in decent condition, because they are part of their retirement. Good tenants, that take care of their properties, are not likely to be evicted. With the lack of construction in the community, in the last 20 years, to keep up with the housing needs; it’s no wonder there is a shortage of rentals. Once policy makers stand up to anyone with a complaint about something being built in their neighborhood, and approve their projects to streamline their construction, hopefully, we’ll see some increase in the housing stock in our community. Until then the rents are only going to go up!”

In his June 2017, Press Democrat article, Kevin McCallum stated that, “Combs, the councils most ardent rent control advocate, isn’t talking about trying it again anytime soon. Her priorities are getting a rental inspection program up and running to ensure people aren’t living in substandard conditions, funding legal services to protect tenants, focusing on the city’s housing plan, floating a housing bond to support the construction of affordable housing and possible instituting just -cause for eviction without rent control.”

In November, Robert Digitale reported that, “The October wild fires grabbed hold of a constrained rental market and squeezed it by the throat. Such groups as Legal Aid and the North Bay Organizing Project said they have started discussing the need on an emergency basis to enact a ‘Just Cause Eviction’ law.

The council also recently set an emergency limit on

rent hikes to no more than 10% through April 8, 2018, a provision that reflects state law on price gouging.”

Rob Muerath, Public Affairs consultant involved in defeating rent control in the local election stated, “Rent control and Just Cause eviction is an issue to watch, not only locally, but on a state level. As the need for affordable housing rises, officials are looking

“ The October wild fires grabbed hold of a constrained rental market and squeezed it by the throat...”

—Robert Digitale to gain political support from their constituencies.”

As our county focuses on rebuilding and scrambles to look for ways to create affordable housing, post fire, you can see that the Rent Control and Just Cause Eviction debate is nowhere near over.

Sources: Costa-Hawkins.com/Cal-legislative-update Cal Legislator-2017-18 Regular Session Oakland Post, Sarah Carpenter, January 16, 2018; “Landlords, Tenant Rights Groups Flood Capital Building” Press Democrat, Kevin McCallum, “Santa Rosa Rent Control beaten the ballot box,” June 6, 2017 Press Democrat, Robert Digitale, “Families, workers in Sonoma County on edge as rental market tightens after fires,” November 11, 2017

APRIL 2018

Real Estate Watch 3

PO Box 11248, Santa Rosa, CA 95406 BRE Lic. # 01525482

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We know every property, every owner and its history. We are THE Northern California Commercial Real Estate Experts.

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4 Real Estate Watch

APRIL 2018

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