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April 28, 2017

Trump Tax-Real Estate

by Bob Schwartz

Trump Tax-Real Estate

La Jolla Colony rental - Trump Tax-Real EstateHow would the recently proposed federal tax cuts affect real estate? ffirst of all, I should emphasize that these are only proposed tax revisions and cuts  and anytime you’re dealing with legislation many times it looks far different when, and if, it’s passed, then when it was first proposed.

So, with that in mind here is what a major national real estate company thinks of president trumps just proposed tax revisions and cuts:

Higher borrowing costs.  Lower tax rates for corporations (from 35% to 15%) and individuals (the top rate would drop to 35% from 39.6%–and the 3.8% Medicare surcharge would be eliminated as well) likely means higher budget deficits.  It’s unclear how these tax cuts would be paid for, and it’s possible that the tax rate reductions could lead to higher government borrowing needs, which could push interest rates higher—for developers, corporations and home-buyers alike.

Higher after-tax profits for pass-throughs, such as hedge funds, law firms and real estate partnerships.  Sole proprietorships, partnerships, LLCs and S corporations are pass-through entities, which means that these companies are not taxed at the entity level.  Instead, owners pay taxes on their firm profits at their individual marginal tax rate—as high as 39.6%.  The president has called for these pass-throughs to be taxed at the same rate as corporations, meaning that there will be a significant increase in after-tax profits for these firms.  

Potential employee (relocation) impact?  In raising the standard deduction to twice its current level (to $24,000 for married couples), the new tax proposal would eliminate all other deductions–including the ability to deduct state and local taxes.  (The mortgage interest, charitable contribution and retirement savings deductions would be preserved, however.)  Individuals who live in high tax states like California and New York (and who are assessed a municipal tax on income may face higher tax bills.  Similarly, single-family home prices in areas where property tax bills are high may also take a hit, as property taxes will no longer be deductible.   

Preference for rental housing?  A higher standard deduction could mean the incentive from itemizing deductions such as mortgage interest disappear for some.  If the financial benefit from deducting mortgage interest is no longer part of the equation, it’s possible that the allure of homeownership could fade for certain individuals, leading to a preference for rental over owner-occupied housing.

Trump Tax-Real Estate

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