The new tax plan is designed to create additional wealth opportunities for average real estate owners and landlords. The continuation of Section 1031 allow investors to profit from investment into new properties. Small landlords may profit more, rather than getting taxed as much as 39.6 percent on high-end properties, as homeowners reporting income as a partnership or a limited liability company may be taxed at the corporate tax rate of 15 percent. This bodes well for those who are experienced in commercial and small rental property investment and others who may be encouraged to take their first steps into owning and renting real estate property.
Understand more about how the new tax bill may benefit commercial real estate owners and smaller property investors and how it may create new opportunities and challenges today.
What Are the Benefits for Commercial Real Estate Owners and Landlords?
Commercial real estate owners may see a number of benefits under the GOP tax plan. Owners may be able to lower their taxes, get around the 30 percent limit on deductions on interest expenses and reduce the depreciation period for commercial property from 39 to 25 years. Proposed House and Senate bills continue the 1031 exchanges as it allows profits to be reinvested and avoid taxation. Investing in real estate may offer better returns than REITs when corporate taxes are lowered to 15 percent.
Small investors are excited about the new tax bill being discussed on Capitol Hill. Investors may come out ahead of owner-occupants. Those who invest in single-family homes may be able to write off all expenses relating to renting and owning the rental property. These properties would be viewed as a business.
What can be deducted from income produced from a property? Investors can continue to deduct repair and management costs, as well as mortgage interest. The use of these deductions and reduce tax obligations for investors and this will remain intact under the tax proposal.
The potential of the tax plan, if it is approved, may increase demand for single-family rentals. Those who own their own home may find it less desirable to do so when new restrictions are imposed and potential deductions moved off the table. If the new tax bill is passed, homeowners may have less incentive to own their own home. First-time homebuyers may put off purchasing a home until a new set of regulations are created to support their objectives. Owner-occupants of single-family homes would not be able to take advantage of property tax deductions and will have to contend with a lower limit for their mortgage interest deduction. Owners with higher-cost properties and others that itemize may be at a disadvantage. Tax-benefits appear to be aimed at those investing in renting single-family properties rather than owning and living in them. Commercial property owners may be able to increase their profits and reinvest the funds into new properties in the foreseeable future under the new tax bill.
How May the Market Change?
As the market changes to respond to interest in single-family properties, once can eventually expect that home value would appreciate in hot markets and in those where landlords and agents may receive higher rental incomes from tenants. There are many areas that do not have enough rental properties available to meet the local demand. Those homeowners that hold out and continue to stay in their homes while demand rises, may see values increase when it comes time to sell. This would make for less motivation to sell a property in the next few years and may exacerbate a lack of supply in some areas. There is always the chance that owner-occupants may choose to rent out their property to cash in on the change, incentivizing new individuals to become first-time landlords. There are homeowners in luxury destinations considering plans to list their property as rentals.
On the other hand, some industry reports predict a decrease in home prices. There are thoughts that the tax bill could impact home prices up to 10 percent. Investors counting on the property to appreciate may find this takes longer to occur under the new tax bill.
Currently, there is less being said about how the changes may benefit commercial real estate owners when compared to single-home owner investors. However, property depreciation may negatively impact commercial real estate owners as well as single-home investors.
What Will the Future Hold?
Will demand for homes rise? Will property values appreciate? Under the bill, the government is pairing fiscal stimulus and an increase in interest rates. Owning a home could become more expensive. Younger generations may rent for a longer period, making renting single-family homes more profitable for landlords. Commercial real estate owners may continue to invest profits into new developments and a new wave of investors may be encouraged to get in on the inviting environment potentially created under the new tax bill. There are many scenarios to consider due to potential changes and investors and commercial property owners would do well to investigate all of the fine print when the new tax bill is approved.
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