- \n
- High-net-worth investors will receive a 20-percent deduction on income from pass-through business entities. This applies to ownership via partnership, LLCs, and investors in public and private real estate funds.<\/li>\n
- Taxpayers can factor in 2.5 percent of the original purchase price of commercial real estate assets as part of their 20 percent deduction. The combined effect of these first two benefits could create a 25 percent tax reduction (10 points \u2013 from a 39.6-percent to 29.6-percent\u00a0rate).<\/li>\n
- Section 179 of the tax code has long allowed limited deductions for capital improvements in the current tax year. The new law expands this allowance significantly, which could result in significant paper losses for some capital improvements. For example, a new roof or HVAC system, which would have been depreciated over many years before, can possibly be fully deducted in the current year under the new law.<\/li>\n
- Though the new law eliminated the tax-deferred 1031 exchange for many asset types (like airplanes and other types of personal property), it was retained for real estate. This is a wonderful benefit we got while others lost out.<\/li>\n<\/ol>\n
Steven Ginsberg, co-founder of the Chicago-based law firm Ginsberg Jacobs, says, \u201cAll in all, real estate represents probably the most accessible way<\/em> for high-net-worth investors to profit from the tax law.\u201d<\/p>\n
My company doesn\u2019t invest in (or recommend that others invest in) an opportunity solely for the tax benefit. It must first be a sound investment with solid risk-adjusted cash flow\u2014and an opportunity for capital appreciation.<\/p>\n
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<\/p>\nAnother Less Obvious Benefit of Tax Reform<\/h2>\n
In addition to these direct benefits to multifamily syndicators and investors, a less obvious but very powerful multifamily benefit is the doubling of the standard deduction for tax filers.<\/p>\n
In a new article<\/a> on tax reform\u2019s effect on multifamily, Brian Croce<\/a> expands on this issue:<\/p>\n
\u201cBy doubling the standard deduction, Congress has greatly reduced the value of the mortgage-interest and property-tax deductions as tax incentives for homeownership,\u201d says the National Association of Realtors. \u201cCongressional estimates indicate that only 5\u00a0percent to 8 percent\u00a0of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90 percent\u00a0of taxpayers.\u201d<\/p><\/blockquote>\n
Sepi Ghiasvand, an attorney with Hopkins & Carley in Palo Alto, California, says this is \u201canother disincentive for people considering a home purchase.\u201d<\/p>\n
John Isakson, chief capital officer at Preferred Apartment Communities,\u00a0says doubling the standard deduction is going to \u201ckeep people who rent renters for longer because it takes away one of the bigger incentives to own a home.\u201d<\/p>\n
Related:<\/strong>\u00a0How the Final GOP Tax Bill Will Affect Real Estate Investors<\/a><\/em><\/p>\n
The Dark Side of the New Tax Law<\/h2>\n
There\u2019s got to be a downside, right?<\/p>\n
Initially, it was hard to find one. And I don\u2019t see a downside in this sweeping new legislation. But this law may have a side effect that will create new challenges for multifamily syndicators.<\/p>\n
In a Bigger Pockets article<\/a> that I penned late last year, I predicted that the multifamily market frenzy was nearing the top, and that we would likely see a softening of prices and competition in 2018 and beyond.<\/p>\n
I think I was wrong.<\/em><\/strong><\/p>\n
As I speak to investors and other syndicators, I have been sensing that the tax reform act has injected new life into a market that most thought was past its peak. This short post<\/a> published in National Real Estate Investor<\/em>\u00a0(NREI) confirms my suspicion.<\/p>\n
Last November, only 26 percent\u00a0of NREI readers believed the market would continue to expand. Just two months later, that number jumped to 41 percent, which is over a 50 percent\u00a0jump (15 percent\u00a0\u00f7 26 percent\u00a0= 57 percent\u00a0increase). And their survey showed that the number of respondents who believe the market had peaked dropped from 59 percent\u00a0to 45 percent.<\/p>\n
Though we don\u2019t depend only on investor sentiment, let\u2019s face it\u2026 sentiment and widespread beliefs will drive behavior.<\/p>\n
Related:<\/strong>\u00a0The Ultimate Metric You Need to Find Value-Add Apartment Deals<\/a><\/em><\/p>\n
What Does This Dark Side Mean For Multifamily Investors?<\/h3>\n
Just like last year (and every year), there can be a temptation among some commercial real estate syndicators to overpay for an asset. To bank on the capital appreciation more than the current cash flow. To acquire a marginal asset to pocket the fees and hope the investors won\u2019t mind. Or to allow the tax tail to wag the investment dog.<\/p>\n
I find this reprehensible<\/em>.<\/strong><\/p>\n
Yes, that\u2019s a strong word, but that\u2019s how I feel.<\/p>\n
I\u2019m calling on multifamily syndicators and individual investors to never knowingly overpay for a multifamily asset or bank on it\u2019s appreciation potential at the expense of its current and projected cash flow. <\/em><\/strong><\/p>\n
That\u2019s how multitudes of single family home investors were burned in the last downturn, and we won\u2019t play that game.<\/p>\n
Appreciation is great, and we hope for it in every deal, but appreciation is like a bipolar friend. It\u2019s great when we get it. But we should never count on it.<\/p>\n
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