In the wake of Republican-led tax bill being pushed through the house and senate in rapid-fire fashion, commercial real estate is poised for big gains.
Though there are some disparities between the current House and Senate versions of the bill, it looks like the commercial real estate market will fare better than the residential real estate industry.
“From the commercial front, the treatment is quite favorable,” Heidi Learner, economist, told The Real Deal. “But any perks could be offset by higher interest rates.”
Real estate investment trusts and Limited Liability Companies look to be the biggest winners due to a few ‘loopholes' that have been made even wider by the legislation.
Major real estate investors and LLCs in large U.S. cities already rely on pass-through deductions. These rely on tax cuts for corporations, and this bill provides those in spades. The corporate tax rate is being cut from 35% down to 20% on both versions of the bill. Further, wealthy investors keen on passing their fortune to an heir are likely to rejoice at the fact that the bill proposes to double exemption levels for the estate tax with the end goal of eliminating it altogether.
Currently, about 55% of Americans die without an official will, while wealthy American heirs are taxed heavily upon receiving their parent's estate. Republic legislators have been trying to eliminate the estate tax for a long, long time.
As for residential real estate, there could be some problems. The elimination of private activity bonds could end poorly for construction projects involving affordable housing. These bonds essentially provide for 30% of low-income housing construction costs. The tax bill could put a damper on affordable housing investment.
“You would be looking at a 65% reduction in the production of affordable housing,” said Chris Eisenzimmer, Greystone director of affordable development. “It’s creating a lot of uncertainty amongst investors and owners.”
For those who have a mortgage on their home, your interest deduction will be capped at $500,000 down from a cool million. What this means is you will no longer be able to receive a deduction when you claim paid interest on your taxes for an amount over $500,000.
The 59% of homeowners who, in 2016, said that they wished for a better understanding of their mortgage might have to rethink how they do their deductions come tax season.
For the roughly two-thirds of homeowners recently surveyed who plan on renovating, however, you might just be in luck. When the market sees new money flooding in, as it likely will due to the litany of tax cuts on the horizon, everything becomes bullish, resulting in a sellers' market. The potential problem here is that new, speculative money will enter as well, leading to another potential bubble in the housing market.
Of course, so much remains to be seen, and even tax pros are still reading the fine print of the Republican tax legislation. No matter what politicians, on either side of the aisle, may be saying, the long-term effects of the legislation are impossible to foresee.