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How the new Tax Plan will Impact Commercial Real Estate

Republicans in the house and senate have come to a tentative agreement on the tax reform bill, according to CNN.  Here are some of the impacts on the industry from the overhaul of the U.S. tax system. The new tax plan won’t apply to Commercial Real Estate investors filing their taxes on January 22nd of next year.

These are the Breaks

Pass through entities tax will get a 20% deduction. A break for owners, partners and shareholders of S-corporations, LLCs and partnerships — who pay their share of the business’ taxes through their individual tax returns. The corporate tax rate is 21%, slashed from 35% and the alternative minimum tax is also repealed on corporations. Individual filers will still have to calculate their tax liability twice.

The hope here is that businesses will reinvest the gains from these tax breaks into the national economy. The good fortune trickling down as new jobs due to the increase of the profit margin.

The Burdens

There’s no such thing as a free lunch. The gains for businesses and investors are offset by losses for homeowners and consumers. The cap is lower on the mortgage deduction, with $750,000 as the highest deduction on interest allowed. Currently, the tax deduction cap is at $1 million.

The bill also removes deductions on home equity loans and raises the standard deduction for property taxes to $10,000.  These changes in mortgage deduction will result in less people buying homes, according to a Forbes report.  Could this mean another spike in rental rates?

The More Things Change, the More They Stay the Same

Under the new tax plan, investors will still be able to defer capital gain taxes as well as facilitate significant portfolio growth and increased return on investment with the 1031 exchange.

The carried interest tax break remains but now requires holding assets for three years to before treating them as capital gains.

What the Experts Say

Chief economist of Cushman & Wakefield, Ken McCarthy expects the industry to have its biggest year yet in 2018. McCarthy told Bisnow:

“The U.S. economy seems to be picking up. With tax reform passing, you should see more investment. Europe is doing well, Asia is doing well. Next year could be the best year of the entire cycle.”

Heidi Learner, chief economist of Savills Studley had a more tempered response to tax reform and the future of commercial real estate.

“It’s less about any one factor than do you want to be the person that bought in at the peak,” said Learner to Bisnow. “The peak is coming, whether it’s now or a year from now or two years from now.”

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