With the transition into any new presidency, there is much change that will take place. As stock markets demonstrated, from the very first day of President Trump taking office, our economy will be highly impacted by his administration. Looking specifically at commercial real estate, there are several predictions we can make as to how Trump will impact the industry. Take a look!
It was his main focus on the campaign trail and it will surely be his main focus in office. Trump is looking to implement substantial tax reform to “help the American people.” Now the details of what this reform really looks like is unknown; however, we can predict that real estate tax codes will be impacted. For example, Trump has proposed an across-the-board 15 percent tax rate for corporate or business income. This reduction will lessen the burden on business owners, including those in the real estate industry.
While an across-the-board tax cut for corporate and business income is a welcome change, many real estate professionals are worried about what Trump will then do with carried interest. Carried interest, which is a managing partner’s share of the profits from a partnership, is taxed at the capital gains rate of 20 percent. If Trump should choose to eliminate this deduction and tax it as ordinary income, the sweat equity of real estate entrepreneurs would hold less incentive.
“We will eliminate the carried interest deduction and other special interest loopholes that have been so good for Wall Street investors, and people like me, but unfair to American workers,” Trump said in an Aug. 8, 2016, speech at the Detroit Economic Club.
1031 Like-Kind Exchange
1031 Like-Kind Exchanges are named for their particular section of the tax code. Under the current law, taxpayers who sell one property and buy a similar one may defer taxes on their profits for years. Trump has not taken a stand, either way, on 1031 exchanges, but the real estate industry should be wary as to whether this is another soft target that may come under fire when reforming taxes. Eliminating the deduction has the potential to add $1.2 trillion in tax revenue over a decade, but it could dramatically reduce real estate investment and decrease property values.
The most obvious, but possibly the most important prediction is that any changes will require a good deal of compromise from all parties. No one is going to get everything they want exactly as they want it. This goes for the Trump administration, legislators and the American people. We may need to give in some areas in order to get something we really want. In commercial real estate, this may mean closing a loop hole, but benefitting from a larger tax break overall.
The full extent of the Trump administration’s impact remains to be seen, but the world is watching closely!
Do you have other predictions to add about how the Trump administration will impact commercial real estate? Join in the conversation by adding a comment below!