The AAA Storage Podcast

Welcome to the AAA storage podcast,
your integrated real estate and

development partner, exploring all
things, self storage investing to

bring you diversified success.

Let's dive in.

Brandon Giella: Welcome back to another
episode of the AAA Storage Podcast.

I have with me as always, Paul Bennett.

Thank you for being here.

Today we are talking about the new
legislation that was recently passed,

uh, in the house and in the Senate called
HR one, the one big beautiful Bill Act,

and it is the landmark legislation from
Trump administration and it has of course,

some impact on real estate investing.

And so Paul, you have.

Pour through the bill and notes and
commentary and have some insight

on how this might affect investors.

So I would love to hear
your thoughts on it.

Paul Bennett: Great.

Thanks Brandon.

Always fun to be here.

Uh, yeah.

HR one or the, the big beautiful
bill as it's been referred

to, um, does have an impact on
commercial real estate investing.

Uh, and I'm gonna try to
cover about seven things.

Actually.

There are three or four that I
think are really at the core,

but we'll mention the others.

But before we get started, I wanna be sure
to, to remind everybody that I'm not a

CPA and I'm not about to give tax advice.

Um, and so, you know, if you hear
something and what we cover today, that's

interesting, uh, and you wanna explore
it further, get to the details and, and

make sure it's applied correctly in your
situation, you need to talk to your CPA,

uh, we're just gonna try to give you.

An idea of the areas that might be
worth investigating, um, as a passive

investor in commercial real estate.

So, um, with that, Brandon,
we'll, we'll jump in.

I'm gonna go from sort of least
impactful to what I think is the most

impactful provisions of this bill.

Um, and, and we'll.

Sort of roll over some
things pretty quickly.

Others will stop and dive
in a little bit more.

Um, a couple of things that the
bill did, it, it expanded the

state and local tax, uh, uh, caps.

So particularly if you're in a high
tax state, it will allow you to

deduct more of the cost of state
and local taxes that you pay related

to your investment real estate.

That really doesn't have an
impact on, for example, our fund.

Um, and, and.

Typically syndicated investor
investments, but more on personal real

estate, uh, or rental, residential,
re real estate, rental real estate

that that an investor may own.

Uh, but that was one
provision of the bill.

Um, it preserved a mortgage interest
deduction, which is, I think critical

and, and crucial, uh, in real estate,
both personally for your own home as well

as for any investments that you make.

Those were a couple of the smaller
provisions of the bill, uh, that I

thought were just worth mentioning.

Um, the next thing on the
list is opportunity zones.

If you're not familiar with them, uh,
the 2017 legislation created designated

opportunity zones around the country
where they offered, um, specific and in.

Pretty dramatic incentives to
invest in real estate and operating

businesses in those areas.

I'm not gonna try to
dive into every detail.

Evidence's incredibly complex.

There are investment opportunities
that are built around the, uh,

the, uh, opportunity zones.

And if you're an opportunity zone
investor, what you need to know is

that they've improved the incentives
and they've extended the life

of the opportunity zone concept.

As well as added additional opportunity
zones where if real estate is located

in, in those zones, you can defer taxes,
um, on a sale if you, if you hold it

long enough and if, and ultimately
even avoid taxes completely if you hold

a property for longer than 10 years,
uh, that is in an opportunity zone.

So the opportunities.

Opportunity zone provisions were enhanced.

Um, next on the list is the 10 31
exchange, uh, which is a like kind

exchange provision in the tax code that
allows you to sell a property and roll

those proceeds into another investment
in a similar type of, of real estate.

Uh, and the 10 31 exchange
provisions were protected.

There were no changes made to them.

Um, and if you're familiar with 10 30
ones, and I know a lot of folks out there

use them, uh, on a regular basis, uh,
and may invest in some 10 31 oriented

exchange funds, the opportunity to do
that and the provisions around it weren't

changed in the big beautiful bill.

So, no, no new news there.

But the good news is
there were no changes.

Um.

What some might view as a negative
element of the big beautiful bill related

to, um, to commercial real estate is
that it eliminated almost all of the

tax credits related to green energy.

So, for example, in the storage industry,
it's become more common to put solar

panels on the roof of storage building.

Uh, there were tax credits available that
had value to the investors and obviously

it created another, uh, revenue stream.

'cause you could sell that
power back into the grid.

The tax credit, you could still do
the business part of it, but the tax

credit for, uh, solar and other green
initiatives have been, uh, eliminated

as part of the big beautiful bill.

The next two, uh, and I'll stop and
take a breath there, Brandon, any, any

questions on your part or any, anything
that I missed or you want to add?

Brandon Giella: No, no.

That's interesting about the solar
panels though, to think about it.

'cause it, it, it, I wonder how that
will affect the market, whether people

or will continue to add solar panels
onto the storage units because maybe,

you know, it could help power the, the
facility and all that kind of stuff.

But yeah, I'm just curious
how that would work.

Paul Bennett: I, I think from an
economic standpoint, it probably

removes most of the motivation.

Um, we, we have not done it.

We've looked at it.

In fact, we were studying
it, um, as we looked at fund

two, um, and, and considered.

There were a couple of groups out
there that, uh, that brought concepts

to us that looked interesting.

Without the tax credits, I'm not
sure, just from a purely business

standpoint, from a philosophical
standpoint, um, you know, there,

there may be lots of good reasons to
do it, but from a purely financial

standpoint, I think the tax credits
were pretty important to that equation.

So I wouldn't wanna be in the
solar panel business right now.

I, I guess is the way I'd put it.

Brandon Giella: Understood.

Yeah.

Okay.

Good.

Paul Bennett: The last two things on the
list are, are I think where the biggest

impact is, uh, in the big beautiful bill.

And the first one is qualified
business income deduction.

And for many of you out there,
particularly if you invest in income

oriented real estate funds, this may
be something that you're not familiar

with and I would highly recommend that
you talk to your CPA and get familiar

because it's a pretty substantial benefit,
the the qualified business income.

Deduction.

Was increased in the big beautiful bill
from 20% of the qualified business income

to 23%, and they also added and refined
some safe harbor provisions that make

it much easier for a passive investor
to take advantage of those deductions.

Um.

They, they, there are some
earnings limitations, um,

that, that come into play.

If you make more than $191,000
a year as a single person or, or

$383,000 as a, a couple filing
jointly, um, you can find that your,

your QBI deductions are limited.

Um, but, but there are even
some exceptions beyond that,

uh, around the, the, uh.

The unadjusted basis in the property.

And, um, there are some calculations that
can be done, but I, I think the thing

I wanna point out and, and I didn't do
this very well at the beginning, is that

the qualified business income deduction
allows you, let, let's say you're an

investor, uh, in a, uh, in an income
oriented self-storage fund that's buying

existing properties and you're getting a,
a 6 or 7% cash on cash return every year.

Um, and reporting.

And your pro rata share of that income
is being reported on your tax return,

I mean on your K one, which is, is
ultimately impacting your tax return.

Just as an example.

Let's say that, that you had $10,000
of income reported on your K1 to you

as your pro rata share of income from
that investment for a given year.

The the qualified business income
deduction allows you, in this

example, to take a $2,300 deduction.

On your tax return to offset a
portion, 23% of that $10,000 of

income that you reduced, therefore
reducing your ultimate tax bill.

Um, and I think most people think the
qualified business income deduction only

applies to real estate professionals.

That's not the case.

Um, it's actually well designed for
passive investors who own an interest

in an LLC or a limited partnership
or a real estate investment trust

to take advantage of this deduction.

And depending on how much, um, qualified
business income you have from rental

real estate, um, it could be, it could
be meaningful and I think it's often

overlooked by most passive investors.

So, um.

I, I would just suggest I've
done a, probably a poor job

trying to give you some details.

Um, there are some safe harbor
requirements that have to be met

for a passive investor, uh, to, um,
to take advantage of the deduction.

There, there has to be at least
250 service hours or work hours.

Own the property by somebody.

It does not have to be
the passive investor.

Obviously they're passive.

A property manager, in our case, a
sponsor who's also the property manager.

Uh, you do have to keep separate
books and records for each

property, um, in, in order to, um.

Uh, qualify for the deduction, and then
you have to keep written documentation

of the hours of service and who
performed them on the property each year.

Um, in our case, we tick all three
of those boxes so our investors

would be qualified to take the
qualified business income deduction.

And, and just to be clear.

It can't be offset.

It's not calculated
based on service revenue.

It's really only based on rental
income generated by real estate.

So, but which perfectly applies
to commercial real estate

because that's what we do.

So, um, but it's a, it's a, it's, I think
it's an overlook provision in the tax code

and I think probably a lot of CPAs aren't.

Focused on it.

So if you have a, a portfolio of real
estate that's generating significant

income on an annual basis, I would
suggest you talk to your CPA dive

into it and see if there may not
be a benefit in there for you.

Brandon Giella: I was gonna say, uh,
I don't know, tax accounting at all.

But that sounds like a really obvious
one to bring up with a CPA, especially

if they're investors in AAA's funds,
because you guys do tick those boxes

and can provide that documentation.

So that sounds like an
obvious choice to bring up.

That's awesome.

Paul Bennett: Yeah, I mean, you know,
um, a, a a $2,300 deduction won't

change your life, but it's better
than a sharp stick in the eye, right?

I mean, um.

Brandon Giella: a phone call.

Yeah.

Paul Bennett: And, you know, at the
35% tax bracket, I can't do the math

in my, my head fast enough, but that's
seven or $800 worth of tax savings.

Um, and uh, and, and obviously if you have
a hundred thousand dollars of, of, of.

Of passive income from real estate.

Um, you know, then it becomes
even more substantial.

Now it's a $23,000 deduction.

So, um, which, you know, which
has a corresponding benefit.

The last item on the list in the big
beautiful Bill is the one that I think

will impact, um, most passive real estate
investors more than any of the others.

Although I think QBI is sub substantial
and that is the bonus depreciation.

Uh, in 2017, uh, in President Trump's
first term, uh, they created the bonus

depreciation, uh, where in the, in
the first years of that, you could

deduct 100 of the depreciable basis.

You have to do a cost segregation study.

You have to componentize the project
in, in order to identify the, uh,

the amount of, of depreciation.

But you could take 100
That was phasing out.

It was down to 60% in two.

2024 and would be and, and is 'cause that
provision still survives 40% in 2025.

However, the big beautiful bill
brought bonus depreciation back a

hundred 100 depreciation in year
one, which substantially improves

or impacts cash flow in a positive
way and provides potentially passive

losses that you can use to offset
other passive gains, uh, or income.

Uh, and, and so it, it is
reinstated at a hundred percent

of depreciation in year one.

The properties have to be purchased
after January 19th, 2025, and they

have to be placed in service by, um.

January 1st, 2030.

Um, there is a special category called
qualified production Properties.

That's basically factories and industrial
facilities, and they get an extra year

to be placed in service so they can
be placed in service as late as 2031.

Um, but the, the.

The, and they also increase the Section
1 79 limits, uh, which is the, the,

uh, rapid depreciation of certain
assets from 1 million to two and a half

million dollars in terms of the limit
of those deductions that you can take.

But all in all, uh, the, the.

Reinstatement of the a hundred percent
bonus depreciation in year one is

likely to have the biggest impact on
real estate investors across the board.

Um, because it, it does allow you,
particularly in, in our case, we,

we happen to sit in a situation
because we're developing real estate.

Um, where the bonus depreciation
obviously comes into play and allows

us to deduct in self storage, about 60%
of the total project cost is generally

what would qualify, uh, for, um.

For the bonus depreciation.

So on a $10 million project, we're looking
at a $6 million depreciation loss or

write off in the first year the properties
when the property's placed in service.

And that, of course passes pro
rata, uh, to all of our investors.

Um, if you, as we are in the fund, if
you're building multiple properties

at one time and you're also.

That portfolio is not
generating revenue yet.

Um, because it's early in its maturity.

Um, you can get some pretty
substantial losses in the early

years of, of a development fund,
a growth fund like our fund.

So, um, we think that's
gonna be, know, be a, a.

A very positive thing for our investors.

I, I will remind everybody
that, that, that depreciation

is simply a deferral of taxes.

It does not allow you to, to escape
paying taxes forever because when

the property is sold, there's
recapture of that depreciation, um,

in generally as ordinary income.

There are, there are some nuances to that,
but it is, is really only a deferral.

But if you could avoid paying the tax
own those dollars for four or five

years, there's some value in that.

You know, um, even though you
have to ultimately pay the

taxes, uh, down the road, so.

Brandon Giella: Okay, I, I may
be naive, but I think maybe in

an example might really help.

So let's say I'm an investor and
I put in $200,000 into the fund.

And let's say it's this $10
million property, $6 million is,

uh, has a depreciation effect.

How, how does that impact me as,
uh, if you were to kind of calculate

my taxes over the couple years?

I mean,

Paul Bennett: So in, in, in your example,
um, in your example, it was a single

property fund with a $10 million piece of
real estates and you invested $200,000.

So that means essentially you own
2% of that partnership when they

take the $6 million deduction.

Um.

For the bonus depreciation.

And let's just to keep things
simple, let's say there was

no other economic activity.

Um, you know, obviously there would
be some, some small amount of income

in the early months and, and, and
some operating expenses, but let's

just ignore them for the moment.

So you've got a, you've, you've
got a $6 million deduction and you,

you own 2% of that partnership.

So you would be allocated
2% of that $6 million.

Um, uh.

Uh, bonus depreciation loss, uh,
which would equate to $120,000.

So you invested $200,000 and
year one you get $120,000.

Uh, passive loss that
you can use to offset.

Passive gains that are created in
other investments that you made.

And if you don't have any passive
gains this year, or if they don't equal

$120,000, you can roll that, that loss
forward and use it in future years.

So you can bank it and use it at a
point in time in the future where you

actually have, um, you know, have,
have a, a gain offset with a loss.

Brandon Giella: Man.

Fascinating.

Okay.

That could be extremely helpful.

I could imagine.

I mean, obviously there's a lot of
calculations involved in how you do

all that work with an accountant,
but, um, yeah, that sounds amazing.

So I, I, and you guys would, would, um,
provide the documentation necessary?

To, to kind of figure that sort of

Paul Bennett: All of that, all your
pro ratish here, as it as it relates

to qualified business income that we
talked about a minute ago, um, or as

it as it relates to the ultimate net
loss produced by a property or a fund.

Because of this bonus depreciation, all
that information is, is provided to you

in your K one, your form, K one every year
that the, the fund sponsor will issue.

And that's what your CPA uses to do
the tax returns, and he can get all the

information he needs in terms of how much
qualified business income did you have, if

any, or do you qualify for the deduction?

Um, you know, all those things as well
as, okay, what was the net loss on

the K one and how can we apply it in
your personal tax return in, in order

to, to get the, the highest benefit?

So yeah, in that example,
you would've received a K one

that showed $120,000 loss.

As your pro rata share of the
economic performance of that property.

Um, and, uh, and, and therefore
you get to take that 120,000

loss on your personal return.

Brandon Giella: I'm glad people like
you exist to do all this kind of stuff.

Uh, okay.

So this sounds like a really, um, positive
or beneficial bill in, in specifically.

For real estate investors in this
case, uh, would that kind of, your

overall, you feel like this is a, a
good thing specifically for investors?

Paul Bennett: Yeah, it, it didn't
change any of the fundamentals

of real estate, which I think is,
you know, probably a good thing.

Um, the bonus depreciation has
been a very valuable tool for

people in the real estate industry.

And so bringing it back, it was phasing
out and almost gone to the point where

it didn't have, you know, nearly the
impact that it did, um, originally.

So.

Bringing that back.

I think the qualified business income, all
in the whole, the bill for real estate,

commercial real estate is a positive bill,
but I don't think it changed the world.

Um, you know, I don't think it it changed
any, anything, uh, fundamental, but it

did make some incremental improvements in
some aspects of how the tax code impacts

invested in commercial real estate.

Brandon Giella: Yeah, man.

Helpful.

Okay.

Uh, what else?

Is there any other kind of tidbits
that you found in your research

that are, are useful for investors
that they should know about?

Paul Bennett: I, I, um, you know, I was
really focused on trying to extract the

major provisions of the bill that people
needed to be aware of as they consider.

Investments in commercial real estate.

So there's, I mean, obviously
the word big in the name big

beautiful bill is no misnomer.

Um, it's a, I think, I
think they had a reading of

Brandon Giella: thousand pages, I think

Paul Bennett: Yeah, I think they had
a reading of the bill, um, as part

of the process, um, during the, uh.

The, the, the vote on the bill, and
I think it took 16 hours to read it.

So, um, yeah, so it's, it's, there's,
there's a lot in there and there's a lot

of aspects that affect lots of different
areas, but these are the ones that really

impacted commercial real estate, and I
just thought it would be timely and, um,

hopefully helpful and interesting to,
uh, to have a little chat about 'em since

the, the bill was just passed on July 4th

um, but anyway, thanks Brandon.

Always good to get together.

Really appreciate it.

And, uh, and, uh, if you have
questions, uh, about the things we

talked about today, like I said at the
beginning, please talk to your CPA.

And get guidance from them.

That's the right way to approach this.

I just wanted to make sure people were
aware of some of the major provisions

in the bill that impact real estate.