Cynics will say that President Trump was looking out for his own self-interest with the new tax plan that was approved by Congress and signed into law by the president December 20th. Regardless of whether that’s true or not, the new tax plan definitely favors those who own commercial real estate. Here’s how:
Like-Kind Exchange rules remain unchanged
For the past couple of years, we’ve all heard the dire warnings that the days of the like-kind exchange were numbered. No doubt abolishing or even amending this very favorable tax policy would have been devastating to our industry. Fortunately, as Mark Twain once said, “the report of my death has been greatly exaggerated.”
Less incentives to be a homeowner
The new tax code doubles the standard deduction. New amounts are $12,000 for individual filers and $24,000 for married couples who file jointly. This reduces the importance of:
- The mortgage interest deduction
- The property tax deduction
- The cost of state and local taxes
The capping of these deductions will increase the number of taxpayers who will take the standard deduction instead of itemizing their tax bills. That means there is less incentive for many taxpayers to buy homes. Less home ownership may mean that more people will be renting apartments.
Shortened Depreciation Schedules
Both residential and non-residential properties have their depreciation schedules reduced to 25 years, from 27.5 years and 39 years respectively. This allows investors to realize the tax benefits of property acquisitions more quickly. Shortening the number of years an asset is depreciated over effectively reduces the investor’s income tax burden.
Pass-Through Entities get a new tax deduction
Most commercial real estate is owned by entities such as partnerships or limited liability companies. These companies do not pay a direct corporate tax, but instead they “pass-through” their gains and losses to the individual members of the partnership or LLC. Under the new law, investors in pass-through entities will benefit from a new 20 percent deduction. The deduction is subject to limits and restrictions which were well beyond my limited ability to understand, let alone explain to you. Regardless make sure you have a CPA who is well versed in the new tax rules.
Two Issues with the New Tax Plan
Although I personally like these new tax benefits, I have two issues with the new tax plan:
- It explodes the already gigantic budget deficit. Using the most conservative estimate, it increases the deficit by $1.5 trillion over the next ten years. Why is no one concerned with this?
- It does nothing to lessen the income disparity between the wealthy and those who are not. Long term, if we want to live in a just society we must close this gap, not expand it.
Those are my thoughts. I welcome yours. What do you think about the new tax plan?
Source: 7 Items In the GOP’s Combined Tax Bill That Could Affect Real Estate, Laura O’Keefe, Bisnow National, December 13, 2017; The New Tax Plan: When It Comes to Real Estate Who Wins and Who Loses? Jaymi Naciri, Realty Times, December 20, 2017; The Big Winner of the Tax Bill: Commercial Real Estate by John Engle, Seeking Alpha, December 20, 2017; What Tax Reform Means For Small Businesses & Pass-Through Entities, Kelly Phillps Erb, Forbes, December 22, 2017.