Understanding the CARES Act
Across the country, property managers and real estate investors are working to respond to the rapidly changing environment caused by the continued spread of the Novel Coronavirus. In response to the economic devastation caused by the effective shutdown of the US economy, on March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, full text here) after the bill was unanimously passed in the Senate and the House passed the bill by voice vote. The CARES Act provides a much needed stimulus to individual American citizens, businesses and hospitals that have been negatively impacted by the ongoing pandemic.
Here are the top 3 takeaways of this landmark bill as it relates to property managers and real estate investors:
1. The Federal Government is putting money in (most) people’s pockets
The Act provides $1,200 to American citizens making $75,000 or less ($150,000 in the case of joint tax return filings and $112,500 for the head of the household) and $500 for each dependent child to be remitted ‘as rapidly as possible’.
In addition to these direct cash payments, the government has substantially expanded eligibility for unemployment insurance and provides an additional $600/week on top of the unemployment amount pre-designated by each state through July 31, 2020. For certain Americans, the federal government will be guaranteeing the remittance of at least $15,000 between now and the end of July which will enable a broad swath of the American population to pay their essential bills during this difficult time.
2. There is a huge expansion in SBA Loan options to help Small Businesses weather the storm caused by COVID-19
The Paycheck Protection Loan Program creates a $349b loan program for small businesses that will allow businesses to borrow money without credit available elsewhere, personal guaranty and/or collateral requirements for an array of qualified costs which include:
- Payroll costs
- The continuation of health care benefits
- Employee compensation (of those making less than $100k)
- Mortgage interest obligations
- Interest on debt incurred before the covered period (Prior to February 15, 2020)
Depending on the use of funds, all or a portion of the loan may be forgivable and debt service payments may be deferred for up to a year. The borrower under this loan program is eligible for loan forgiveness equal to the amount spent during the first 8 weeks following the origination date on rent, payroll costs for workers making less than $100k, interest on a mortgage and/or utility payments. This is good news for both property management companies and commercial landlords as it provides a pathway for businesses to continue to rent spaces and pay their employees at no direct cost to them.
3. There are significant new tax benefits for real estate investors.
The CARES Act strikes a provision in the existing tax code that limited the amount of losses stemming from the depreciation of real estate assets that could be used to shelter capital gains from investments. Now investors can write off as many losses from depreciation as they want, and can carry over theoretically unlimited losses from previous years to shelter the current year’s income.
The amendments apply to taxable years beginning after December 31, 2017 and carry through this year.
This provision will unlock a significant amount of cash that would have otherwise been classified as taxable income for real estate investors, giving them additional resources and stronger incentives to continue investing in commercial and residential properties.
While the short term effects of the COVID-19 pandemic are cause for concern within the real estate investment and property management space, the sweeping action taken by the government has given the industry the tools and resources it needs to weather the storm and potentially come out on the other side even stronger.
While I spent the majority of my weekend reading the 808 pages of the CARES Act in addition to analysis by experts, I, or anyone at Revela do not purport to be experts and this article should not be construed as legal or financial advice. Before making any decisions to participate in these programs you should consult with your attorney and/or CPA.