President Trump’s Tax Cuts and Jobs Act of 2018 could have beneficial outcomes for those who currently hold or plan to invest in commercial real estate properties. Many of the new changes have already gone into action starting January 1, 2018 but will not affect those who are filing their 2017 taxes this spring.
The overall goal of the tax plan is primarily to increase the benefits for U.S. corporations to stay competitive and keep their business within the United States by decreasing the C-corporate tax rates from 35% to a mere 21% and S-corporate and pass-through rates to 25%.
Those who run their commercial real estate businesses through a pass-through such as an LLC or S-Corp could see significant tax savings in 2018. S-corporations might benefit from reverting back to a C-Corp and paying the double taxation (that which a pass-through election avoids) to be taxed at the low rate of 21%.
Those tax savings can be used to invest directly back into current and new property investments through new purchases and upgrade which will continue to carry the same tax saving write offs. Individual home owners will see a loss in tax savings as their standard deduction will double to $24,000 for married couples which could eliminate the ability to write off mortgage interest.
The loss of mortgage tax savings for individuals is a barrier to entry for those considering purchasing a home that will possibly lead to an increased demand for rentals and an increase in rental prices.
It is also possible that less single family home owners could decrease housing prices that have continued to grow in leaps and bounds over the past years. Commercial real estate investors, who can write off all expenses of property ownership, may see this as a buying opportunity to lock in cheaper properties and higher rental prices. Add that to the tax benefits of incorporating or operating as a pass-through and it is likely to see more investors entering the market.
1031 Exchange Provision
The 1031 exchange provision continues in 2018, much to the relief of real estate investors. This provision allows investors to defer paying gains tax if they reinvest the gains into similar properties. Both individual, corporate and pass-through entities can benefit from this provision which only applies to investment and business properties.
It is too early to see the actual outcome of Trumps tax plan, but keep an eye on the market as it’s sure to react quickly. Be sure to keep informed of tax implementation over the next year and always consult a tax attorney or accountant. Read more about our Commercial and Rental loan programs and contact us if you have any questions, we’re here to help.