The Impact of President Trump’s Tax Plan on the Real Estate Market 02/06/20

Above: The ever-changing Boston skyline as viewed from the Seaport District.

President Trump’s impending tax overhaul, the Tax Cuts and Jobs Act, is expected to have a resounding effect upon the real estate market. Trump’s plan could hold many advantages for real estate investors and developers, which may result in significant development in the coming years. James Repetti, a tax law professor at Boston College Law School, calls the bill “a windfall for real estate developers” given that the bill favors pass-through businesses, for instance partnerships, S-corporations and limited liability companies (LLCs), that allow income to pass through directly to the owners. Pass-through businesses will see their annual tax bills drop due to a rate cut from nearly 40% to just 25% under Trump’s plan. Given that many real estate development-related entities are organized as pass-through businesses, developers will be able to benefit substantially from Trump’s plan.


Likewise, with Trump’s new changes, interest expenses for property development and construction management, among other activities, will be permitted for tax deduction according to Washington Post economists Drew Harwell and Jonathan O'Connell. While Trump’s plan aims to make like-kind exchanges for businesses outside of real estate, for instance transactions of assets such as rare automobiles, ineligible, like-kind exchanges within real estate will still be permitted. Also known as 1031 exchanges, like-kind transactions enable investors to exchange one asset for another resembling asset without paying any capital gains tax. Thus, under Trump’s plan, owners of commercial real estate will potentially be able to flip properties indefinitely.


Yet even so, some federal initiatives that have helped developers spearhead projects for years will be eliminated under Trump’s plan. The longstanding Federal Historic Preservation Tax Incentives Program, which has benefitted urban renewal developers for years, is attenuated under the bill. While the 20% credit benefit developers currently receive when a restored building opens will be retained, under Trump’s plan, the credit will be distributed over five years after the building’s opening, as opposed to immediately as is currently the procedure. Accordingly, the longer term now required to reap the credit’s benefit could make urban renewal projects, which have helped revitalize many cities, less attractive to “impatient investors who don’t want to wait to cut their corporate tax liability”, explains Chicago Tribune architecture critic Blair Kamin.


The longer period could make it increasingly difficult for developers to finance rehabilitation of existing, run-down buildings, which could in turn inhibit the revitalization of investment-ready neighborhoods across the United States and curtail the increased urban investment that has taken place over the past few years. However, developers may still be able to appeal to affluent communities, especially large liberal cities, whose local governments honor their own State legislation that provides funding to redeveloping historic and run-down buildings and neighborhoods. In 2016, Boston residents overwhelmingly voted in favor of enacting the Community Preservation Act, a state law that, starting this year, will generate $20 million in funding for historic preservation, affordable housing, and city parks. Such acts will enable continued investment in housing despite the curtailing of incentives such as the Federal Historic Preservation Tax Incentives Program.


While investors and developers will likely be able to glean broad benefits from Trump’s plan, there will likely be a shift amongst consumers from buying to renting residential property due to reduced tax benefits. According the latest research by the National Association of Realtors (NAR), first-time homebuyers are not served well by the plan, and even current homeowners could be compromised depending on where they own. Per the NAR, the average first-time homebuyer makes a down payment of less than 10% on their first home, a consequential figure given the new tax plan’s unprecedented limitations on interest payment-based tax deductions.


Under Trump’s tax plan, potential homebuyers will not be eligible for a tax deduction for interest paid on a mortgage for a home worth more than $750,000. Previously, the cap for tax deduction eligibility was $1 million. Current homeowners will be grandfathered into the former $1 million cap; however, homeowners who have purchased properties after December 15th, 2017 are now faced with the new, lower cap, mitigating the potential wealth-inducing impact of Trump’s general tax cuts. Simultaneously, under Trump’s tax plan, a new deduction limit of a combined $10,000 will be set on property, state and local income taxes. Consequently, homeowners residing in states with high taxes, for instance New York, New Jersey and California, could end up owing significantly more this April with the loss of former deductions.


Gone are the days when taxpayers could fully deduct state and local property taxes plus income or sales tax. According to Tax Policy Center senior fellow Howard Gleckman, “[the $10,000 cap] is going to be a significant cost for many taxpayers in high-tax states”. The loss will be particularly appreciable for residents of New York County, who used to draw an average deduction of $24,900 on state and local income and property tax, and residents of Marin County, the immediate suburbs of San Francisco, who drew an average $17,000, according to 2014 IRS data compiled by the Tax Foundation’s Alan Cole. The bill’s revision of mortgage interest deduction, combined with these deduction limits, could lead to home value declines of “as much as 10% in counties with the highest property and income taxes” for current homeowners, according to New York Times real estate reporter Conor Dougherty.


With the incentivization of new homeownership under fire, a rise in renting could be on the way. David Blitzer, Managing Director and Chairman of S&P Dow Jones Indices’ Index Committee, notes that the new expense of owning in places with high taxes could leave “potential home buyers compelled to look at renting,” especially in expensive coastal cities. According to Blitzer, “[home] prices are rising faster than wages, salaries and inflation,” leading to renting making more financial sense than buying and leaving landlords to rake in the profits.


Contrary to Blitzer, Leonard Steinberg, President of luxury brokerage Compass, does not believe in the notion that the new housing market uncertainty will “lead the consumer to become a society of renters with diminished incentives to buy”. Other realtors, however, do not share Steinberg’s optimism about consumer tendencies sustaining a reasonably balanced tilt between buying and renting. Bonnie Casper, a real estate agent with Long & Foster in Bethesda, MD, says the new rules will put a lot of prospective home buyers, particularly those buying their first home, in “wait-and-see mode”, which could prompt a slowdown in the market. “If [buyers are] not going to have a tax benefit,” explains Casper, then they are likely to “go rent and not buy”.


While certainly there is no shortage of divergence in what is thought about the Trump Tax Bill, its’ projected end results certainly point to well-established real estate investors and developers as principal beneficiaries. The foremost consequence to consumers is the shakedown of homeowner tax incentives and deductible mortgage debt. However, real estate businesses can take still take advantage of capital gains through 1031 exchanges. And most importantly, developers will be able to leverage the reduced tax rate of 25% for pass-through businesses, which will escalate income and slash loss on licensing fees. In this rapidly transforming political climate, it seems it is a felicitous time to invest in commercial real estate.

Contributor Bio


Boston Property Ventures, LLC (BPV) is a fully integrated real estate development and investment management firm with focus exclusively in the Greater Boston Area. BPV was founded in 2001 with a simple vision: to harness our combined deep expertise in commercial lending, investment banking, development, general contracting and construction to deliver both client service excellence and maximized risk-adjusted investor returns.

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