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WITH MAJOR TAX REFORM, just being passed, investment advisers are urging clients to proceed cautiously but optimistically. This may be especially true for real estate investors.

 

AS EVERYONE with a W-2, K-1, or 1099 knows by now, the House and Senate passed different tax bills this Summer and Fall, requiring conference agreement to reconcile them by New Year’s Eve. Happily, a compromise bill has been ironed out, and should be signed by President Trump as a Christmas gift to ALL taxpayers. The G.O.P. is riding on the success of this new tax package, and most companies and investors are positioning for a market-friendly outcome. With the political scurrying, jousting (and lobbying) thankfully over, politicians, pundits, and tax preparers may finally read it, and explain more fully what form of “reform” was actually finally adopted. What is already known are seven reduced tax brackets for both individuals and businesses – but many once sacrosanct write-offs will be limited or dropped altogether beginning next year and beyond.

 

ALTHOUGH TAX PLANNING is difficult without actual IRS guidelines, one can safely conclude that deductions will be more valuable in 2017. Conversely, deferring income until 2018 seems as prudent, unless you’re among the “one-percent” of U.S. taxpayers whose ordinary tax rates were reduced only slightly, but with fewer allowable deductions.

 

For W-2 employees:

 

Ordinary tax rates drop for most filers (more than ever of them will pay nothing. Add to this seemingly generous I.R.S. goodie bag a significantly bigger “standard deduction” ($24,000 for couples) and an expanded child credit ($2000 each). For lots of folks, this means simpler tax returns, and hardly any record keeping! But know too that any potential tax savings could be offset by the elimination of traditional personal and dependent exemptions (millennials with no kids will scarcely notice or object).

 

• Those still wishing to itemize actual deductions (i.e. more than the “standard” allowance) will find fewer of them on the new Schedule-A tax form. Charitable contributions remain, but say “sayonara” to tax prep fees, union dues, employee tools and work clothes. Other allowable itemized deductions include property taxes, sales taxes, and state and local income taxes (capped at $10,000 a year in total).  Even NAR’s “darling” property tax and mortgage interest deductions took a hit for mortgage loans over $750,000, but still applicable to principal residences and second homes. Say goodbye also to most employee business expenses, investment expenses, and other “adjustments” like job search and relocation expenses.

 

 For businesses:

 

Corporate tax rates are substantially lower (from 35% to 21%); enough to encourage previously sluggish companies to invest in new jobs, new equipment, long delayed R&D, and other pro-growth endeavors. Adding substantially to these burgeoning corporate coffers should be an under-estimated $3 trillion currently held offshore to avoid U.S. taxation. Repatriating this enormous “mother lode” should magnify this much anticipated, huge financial boost.

 

• Unlike individual taxpayers, businesses will still be able to deduct “ordinary and necessary” expenses, including T&E and loan interest. Conference proposals at one time called for lowering the time period for depreciating residential income real estate from 27.5 to 25 years, unless business interest is also claimed (in which case, the depreciation term would be 30 years). But no one in the public knows for sure.  Regardless, such time periods may be moot as the reconciled bill permits an immediate write-off of more assets.

 

• The restructuring of businesses will likely accelerate once actual legislation is passed. This bodes well for lawyers and accountants as sole proprietors, partners, and corporate bigwigs consider changing their tax entity type, accounting methods, benefit plans, international business structures … and how state tax laws will conform to the federal changes.

 

For investors:

 

• Tax treatment of capital gains and dividends will largely remain the same. Being tax-smart by offsetting capital gains with capital losses will still hold true for next year and beyond. Sellers of their primary residence will see little change to the $250,000/$500,000 capital gains tax exemption. 

  

• Those much revered 1031 Tax-deferred Exchanges will continue virtually unscathed. With rising real estate values, this opportunity will become increasingly popular.

 

• The proposal doubles the threshold for the individual estate to over $11 million, which will likely impact retirement planning, as very few individuals and families would be affected.

 

 

For real estate professionals:

 

• With all this economic euphoria, look for a big surge in commercial real estate transactions, particularly industrial and office space in major metros like Atlanta. New commercial construction will help fill the increasing demand for space, as will creative repurposing of downtown and inner-city buildings.

 

• Look too for more multi-family development, either newly constructed apartments, or renovated “lofts.” Younger, highly mobile workers will more increasingly postpone home ownership –  in favor of comparable, if not more favorable, housing costs… shorter commuting times … and proximity to recreational and other “lifestyle” amenities.

 

• With e-commerce and other social/economic changes, look for a resurgence too of local retailers, particularly non-chain restaurants and boutique shops.