The New Link Between the Tax Bill and Real Estate
Happy New Year.
Let's start with insights about how the tax bill affects commercial real estate, impacting both landlords and tenants.
Some Positives on the Commercial Side
The new law offers several benefits to commercial real estate owners:
Mortgage Interest: Property owners can deduct mortgage interest on commercial properties in full, with net income taxed at 21%, down from 35%.
Cost Recovery: CRE owners receive a full, 100% property deduction in the acquisition year, compared to the previous 50% first-year deduction with continued depreciation.
Pass-Through Taxation: Pass-through entities like partnerships and LLCs pay a top individual rate of 37%, with business income eligible for a 20% deduction. This potentially lowers effective rates to 29.6%, well below the prior 39.6% threshold.
Historic Preservation: The 20% credit for certified historic structures remains available, claimed over five years. However, the 10% credit for pre-1936 non-certified structures is eliminated.
Like-Kind Exchanges: The 1031 Exchange continues allowing capital gains tax deferrals.
More Negatives on the Residential Side
Homeowners face more challenging provisions:
Deductions: While standard deductions doubled, "fewer deductions are being allowed for mortgage interest" to over 90% of taxpayers. New mortgage interest deductions cap at $750,000 versus the prior $1 million, and home equity loan interest deductions are eliminated entirely.
Taxing Concerns: Elimination of state and local income and property tax deductions particularly impacts high-tax states and urban residents.
Urban/Suburban Shift: Higher urban housing costs may drive populations to suburbs, potentially increasing supply while demand declines.
Interest Rates: The anticipated $1.4 billion deficit impact could increase Treasury bond issuance, potentially raising borrowing costs and reducing buyer pools.