Trumps New Tax Plan, Does it hurt RE Investors?

69 Replies

While its only a couple hours old, everyone probably hasn't had a chance to fully digest it, and isn't finalized... does this new tax plan help real estate investors?  A couple key areas that have me concerned;

Let me preface by saying that I am not a CPA and invite anyone smarter than me to rip me to shreds :) 

1.  Eliminating some tax brackets and lowering the rates.  Win all around. Go Donny Go!!!

2. The cap on property tax exception at $10k.  I'm unclear if this is per property or total.  If you own 10 units and have 20-30k a year in property taxes, will you be capped at only $10k or is it $10k per property or entity?  This could really suck.

3. Capping the pass through entity (LLC) tax rate cap 25% and corporate (c-corp) tax rate at 20%. I think this is good for those that own in an LLC since the income will be taxed at no more than 25%

4. Eliminating the SALT (state and local tax) deductions.  BIG kick in the junk to us blue-staters with high state income tax.

5. Limiting the mortgage interest tax deduction to the first $500k.  Same as #2 above, is this per person or per property/entity.  Same as #2 above, not sure if this is per person or entity/property.  If it is the former, that is another HUGE kick in the junk.

What are your thoughts?

Did this pass yet? 

Very interested to see the details of this plan and how the final bill will look. 

My understanding of it as it is right now is that it is only being taken from homeowners. If you own a property and rent it out it's still deductible (both real estate taxes and interest).

Originally posted by @Chris Clark :

My understanding of it as it is right now is that it is only being taken from homeowners. If you own a property and rent it out it's still deductible (both real estate taxes and interest).

 Does that hold true if someone owns a rental property in their own name as opposed to an entity?  

Originally posted by @Matt Leonard :
Originally posted by @Chris Clark:

My understanding of it as it is right now is that it is only being taken from homeowners. If you own a property and rent it out it's still deductible (both real estate taxes and interest).

 Does that hold true if someone owns a rental property in their own name as opposed to an entity?  

 Yes. If you own a rental you still get a deduction. Only affects your personal residence if you own one.

@Matt Leonard The main issue for real estate investors will be the effects on the real estate market.  If it was passed, the issues would be state specific.

I doubt that much of it will pass.  It is important to remember every line in the tax code was written on purpose.  There are people that want each line left exactly as it is.

In general the interest groups have said the following...  "It hurts home owners."  "It hurts the poor."  "It hurts the middle class."  "It mortgages your grandkids futures."  "It helps the rich."

I believe I read verbatim on an article on Forbes that “if you own passive real estate you’ll still come out ahead”. So from what I can tell most of this bill doesn’t hurt RE investors but it would make owning a primary residence more expensive.

This may not pass as is, an opening gambit for negotiation. Hurts Blue states the most, but be aware that there are many Republicans from these states (for example, northern NY has very different politics than NYC), so not all Republicans in the House/Senate will fall in line and vote for it.

I’m no CPA but overall I would say this helps REI, most of the benefits are named above by others. I’ve actually downloaded the massive document and started reading through it in detail. Your heirs would also benefit if you have a sizable portfolio when you finally kick the bucket.

This will hurt me outside of my investment real estate side. People who live in high tax states should consider accelerating itemized deductions. I will be accelerating itemized deductions where possible (paying 2017-18 real estate taxes on my personal residence in a lump sum in December rather than in installments into next year, and also making sure my state income taxes for 2017 are paid in full by December with none due when I file next year). This is just me though, you’ll need to check out your own situation.

Again, I’m no CPA and this may not pass as is.

One of the big items of concern from an investor perspective is any impact on 1031 exchanges and any price impact that changing the definition of principal residence for capital gains tax exclusion purposes (from 2 out of 5 years to 5 out of 8 years) may have on the overall market...

Mortgage interest deduction on investment RE is a BUSINESS expense, not a personal expense. Its treated just like borrowing money to buy any other capital equipment for a business, & would still be deductible. 

There's absolutely no way this will pass, as-is.  I've called a few elected officials our family has helped in the past.  Most said something to the effect of, "I'm concerned and have to read it thoroughly."  Some have outright made assurances that they'd vote against it.  But to all of them, I made the fact be known, "If you vote yes for this, I will be taking my usual donation to run ads against you."  (That got a few of them hot under the collar.)  But most recognized that they are potentially dealing with a political third rail.

Most of the congress-persons have already scheduled teleconferences with their donors to address concerns and go through the risk/benefits ratios of the finer points.  I would encourage you to pull out your taxes from the past few years and see how the changes (dissolution of credits and certain itemizations) would affect you.  

I live in New Jersey and we get destroyed in this tax bill every way. Property taxes above 10K is normal, Houses above 500K is also normal, and state/local income taxes are high.

We will have work around before it can be implemented.  Example Home Mortgage interest deduction disappears: I will sell my house to my brother who I will rent from- just like they are doing European countries. And my brother will do the same. Most RE investors deal with what is thrown at them. 

He’s a real estate investor.

He only cares about self.

Of course it will help real estate investors.

But clearly won’t pass as is, or maybe at all.

A lot of these will hurt many of us at the personal income tax level if we have been itemizing mortgage interest (on a mortgage over $500k) and property taxes on personal residences (over $10k). The biggest impact will be to those investors that are doing the "live-in flips" because they have to live in it for 5 out of 8 years rather than just 2 out of 5 years.

I read somewhere that refinancing amounts beyond the purchase price of the property would be taxable. Would really hurt the BRRRR strategy. Can't find it now. I don't know if anybody else saw the same thing? I know all RE related stocks took a hit, as it pretty much disincentivizes anyone from buying a home.

This is a proposed tax cuts and simplification on personal property deductions. 

$10K per property tax.  Both coasts people can not take deductions as much as before esp for those with estates. Nothing is being said about vacation or investment properties yet. 

1031 exchange deferment can be forgotten. Investors have to pay a tax to trade for like investment. Time will tell.

5. In both coasts most borrowers can take a much smaller mortgage up to $500K at 4% that is half as much as before. Per property for principal residence. If you own half you claim half filing separate return. If you file joint it is just the $500K mortgage. in our area, many have 800-1M mortgage so they take a small hit. 

The congress needs to endorse the bill but it hinted it will be retroactive implying it may hit use by 4/15/18 for 2017 tax. 

Wall Street investors react fear on public builder stocks.  National Association of Realtors who always have a lot to say is crying wolf.

Some of the long debated deductions will go away. Medical, alimony deductions, losses ... They are overdue.

I think it is going in the goodness directions.   

I remember when we lost the tax deductions for cars and credit cards. Do you? Everyone was sure the auto industry and credit cards were going to take a big hit. Not so much.

Originally posted by @Marcus Lawson :

I live in New Jersey and we get destroyed in this tax bill every way. Property taxes above 10K is normal, Houses above 500K is also normal, and state/local income taxes are high.

I just made the same comment.  NJ gets slammed if this passes.  NY, CT & MA not too far behind.

Maybe the problem is that blue states tax people way too much rather than the issue being the new tax proposal....

Originally posted by @Edward Barnes :

I read somewhere that refinancing amounts beyond the purchase price of the property would be taxable. Would really hurt the BRRRR strategy. Can't find it now. I don't know if anybody else saw the same thing? I know all RE related stocks took a hit, as it pretty much disincentivizes anyone from buying a home.

I would be dumbfounded if this were the case. A seemingly common misconception (in general, not pointing at you) is that gained equity is profit. It is not realized until the property is sold and the the equity gains are captured. All a refinance does is convert equity to cash, i.e. making the same asset more liquid. After refi the equity is offset by the loan liability. You're paying that cash back to the bank over the term of the loan so there is no logical argument to tax it.

Flipping this logic around, what if the property value drops below loan value? Would the Government then refund the difference? Capital gains/losses are (and should continue to be) realized at disposition.

Originally posted by @Matt Leonard :

...

2. The cap on property tax exception at $10k.  I'm unclear if this is per property or total.  If you own 10 units and have 20-30k a year in property taxes, will you be capped at only $10k or is it $10k per property or entity?  This could really suck.

...

5. Limiting the mortgage interest tax deduction to the first $500k.  Same as #2 above, is this per person or per property/entity.  Same as #2 above, not sure if this is per person or entity/property.  If it is the former, that is another HUGE kick in the junk.

...

I have the same understanding as those that posted above indicating that these two points would apply to personal property i.e. personal residences. As investors these are business expenses, akin to any other business paying interest or tax on PP&E.

Originally posted by @Saj S. :

Did this pass yet? 

NO! It was just released this week. It will be debated for a long time, and the final result will be a plan that looks nothing like what we're seeing now. Or, like the efforts to repeal Obamacare, maybe they won't agree at all and nothing will change.

But it seems that the current proposal helps rental owners, and hurts retail home buyers and homeowners, which means that RE Investors who are flipping may see ARVs decrease, and owners of single-family rentals, who always had a potential exit strategy to sell to a retail buyer, might see those prices drop too. 

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