Tax Reform: What's In Store for Commercial Real Estate?

Tax Reform: What's In Store for Commercial Real Estate?

Commercial Real Estate Tax ReformTax Reform was a hot topic during the campaign leading up to the presidential election, but details of President Trump's tax reform plan have been slow in coming since inauguration day. Now that it seems other issues have stalled, the administration has moved on to discussions of changes to the tax code.

Although it's still early in the game, and there are many uncertainties, what do the currently suggested changes portend for business and for commercial real estate? While the media focuses on proposed rate reductions for both corporations and individuals, there are other areas that impact commercial real estate, including like-kind or 1031 exchanges, real estate investment trusts (REITs), specific business deductions, immediate expensing, and other proposals that are sure to be hotly debated.

"A Game Changer"

Some analysts point to the president's expertise in real estate development and his oft-cited ability to use the current tax code for profit advantage as reason to believe that recommendations for change will be beneficial for commercial property investors. Others believe that effects may be mixed or that it's too early to begin to assess pros and cons.

In a recent Forbes article, contributor Brad Thomas notes that CPA Jonathan McGuire thinks that repeal of the 1031 law "could actually be positive as it relates to the trade-off being proposed," even though the president reportedly wants to retain the 1031 provisions.

Scott Saunders of Asset Preservation, however, is quoted as saying that the move would "negatively affect many U.S. taxpayers and result in fewer jobs in ancillary services ... like title companies, lawyers, lenders, banks, mortgage brokers, environmental companies, real estate agents/brokers..." and perhaps even cause a decrease in tax revenue to municipalities.

Some note that consequences of the tax stimulus for "middle Americans" might not be so good for business. Even though the proposed lower corporate tax rate, sounds good, elimination of the net interest expense and certain other business deductions might negate the beneficial effects of a lower rate.

What about Landlords and Investors?

The potential for tax savings under a simplified tax code seems to exist, but because specific proposals are still far from enactment, it is impossible to discuss the effects definitively.

It may be sufficient at this point to familiarize yourself with some of the provisions of the proposed tax law, especially as they pertain to owners of multi-family residential properties, small commercial real estate and REITs. Reforming carried interest reporting, currently treated as capital gain tax under the current law, so that it is treated as ordinary income, will certainly affect numerous real estate investors.

A different, but equally significant, effect would accrue to investors who hold small commercial properties through LLCs or partnerships. The president's proposal that income generated by such entities be taxed at a corporate rate rather than as individual income would make owning such property "extremely attractive" to investors, according to a recent analysis from Mariner Wealth Investors.

Just about the only thing that's certain at this point is that change is in the air. How soon it happens, and just what it will look like is, right now, purely a matter of speculation.

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