President Trump finally announced his Tax Reform Plan on November 2. The reduction of corporate tax rates and the lowering of individual tax brackets for high income earners has received the most attention from the media.  But those of us in real estate were anxious to see if the president and Speaker Paul Ryan would follow through on all of their promises to change some sacred cow real estate provisions of the Tax Code.

Not long after President Trump took office, I wrote of some of the potential changes that many experts expected would be included in the Trump plan (see post HERE) regarding real estate. The experts weren’t far off.  I don’t want to discuss the entire tax reform plan, only those provisions dealing with real estate.  The most obvious provision is the mortgage interest deduction.  From the beginning, President Trump said that he would not eliminate this popular deduction.  Instead of eliminating the deduction, the Trump plan preserves the deduction, but it reduces the cap for married couples for mortgages worth $1,000,000 to $500,000.  This reduction would apply to new mortgages only.  Existing mortgages would be exempt.  I suppose the intent was to allow homeowners to keep a tax break that they had when they bought a new home but the effect is that the cap reduction will be a disincentive to home buyers, particularly in areas where home costs are high.

The mortgage interest deduction will not apply to second or vacation homes. Many will argue that this eliminates a tax break on the wealthy.  But the elimination of this deduction has potential to greatly affect the real estate market.  It will put numerous people out of the second home market completely which will depress property values in many places.  Second-home communities (think beach towns and mountain communities) will suffer economically with out the seasonal influx of second home/vacation home owners.

The Trump plan makes it more difficult for homeowners to get the capital gains exemption on their primary residence. Existing law allows you to exempt up to $250,000 of capital gains ($500,000 for married couples filing jointly) if you have lived in your primary residence for 2 of the past 5 years.  The Trump plan will lengthen the time requirement to 5 out of the previous 8 years.  This will provide many homeowners another disincentive from moving further depressing the re-sale market.

The proposed Trump plan retains the deduction for state and local property taxes up to $10,000 but eliminates the deduction for state and local sales and income taxes. Not only will residents of high tax states be hurt by the elimination of the latter deduction, so will owners of income producing property all over the country.

The Trump plan eliminates the deduction for moving expenses. This deduction only applies if you are required to move for a new job or a transfer for an existing job.  While the elimination of this deduction is unlikely to affect most peoples’ decision whether to sell their home and move, it does make the cost of a move more costly and could affect a buyer’s decision on how much to spend on the new purchase, or whether to purchase at all.

The Low Income Housing Tax Credit has been retained under the new plan. Unfortunately, other changes in the Trump plan effectively gut the LIHTC.  Nearly half the new low income housing development is done with private activity bonds.  These tax exempt municipal bonds are scrapped under the Trump plan.  The other half of low income housing development is financed on the tax credit program.  They will become more expensive as tax rates go down because tax credits will worth less.  Some experts predict that over 80,000 fewer new affordable housing units will be constructed next year if the Trump plan is passed.

The president made no changes to 1031 exchanges or in changing the rules regarding deductability of capital expenditures which many experts had predicted would be part of tax reform. However, as the real estate president, maybe we should not be surprised as Mr. Trump has used both provisions in his years as a real estate entrepreneur.

The real estate president has made some surprising tax reform proposals that could have some very adverse affect to the housing market. If passed, housing prices could fall significantly while not immediately attracting new buyers.

There will be a long battle in Congress over tax reform. Despite President Trump’s and Speaker Ryan’s desire to pass the legislation before the end of the year, we are likely to see lengthy debate and multiple amendments.  Already, the Senate has announced its own plan which keeps the mortgage interest deduction and the deduction for state and local income taxes.  It is not only unlikely that tax reform will achieve bi-partisan support, but it is obvious that it dos not have full Republican support.  So, as changes are made, it will be interesting for us to see how the provisions pertaining to real estate continue to evolve.

When President Trump announced that the US would withdraw from the Paris Climate Accord last week, he said that we as elected “to represent the citizens of Pittsburgh, not Paris”. Pittsburgh Mayor Bill Peduto immediately rebuked the president in a Tweetstorm.  “As the mayor of Pittsburgh, I can assure you that we will follow the guidelines of the Paris Agreement, for our people, our economy & future”.  Mayor Peduto, it turns out, is not alone.

As of June 3, 187 mayors have pledged to ignore President Trump’s climate changing policies and will adopt the Paris Climate Accord for their cities. Many Florida mayors have joined this pledge including Mayors Tomas Regaldo of Miami, Phillip Levine of Miami Beach, Josh Levy of Hollywood, Jack Seiler of Ft. Lauderdale, Jeri Muoio of West Palm Beach, Buddy Dwyer of Orlando, Bob Buckhorn of Tampa, Rick Kriseman of St. Petersburgh and Andrew Gillum of Tallahassee.  The group, the Mayors National Climate Action Agenda or the “Climate Mayors”, had previously announced that they would not enforce any executive order which would roll back Obama administration policies regulating energy production or reducing emissions.  The new statement adopts the Paris Accord and pushes for strong climate action.

In addition to the Climate Mayors, a group of 30 mayors, 3 governors, 80 university presidents and 100 business leaders intends to submit a plan to the United Nations, pledging to meet US green house gas emission targets in the Paris Accord, despite the US withdrawal. Michael Bloomberg is leading the efforts of this initiative.  Mayor Bloomberg says that this plan will assure that everything that the US committed to in the Accord will be met and, in many cases, exceeded.

For the last 2 years, California Governor Jerry Brown has been negotiating with state and local governments to sign a “sub-national climate pact” to agree to even higher standards than the Paris Agreement. Following last week’s announcement, Governor Brown said “California will resist”.  Along with the governors of New York and Washington, Governor Brown is seeking to establish a coalition of states committed to upholding the Paris Accord.  Meanwhile, the California Legislature is working to go further.  The California Senate recently passed a bill which would require state utility companies to obtain 100% of its electricity from renewable sources by 2045.

It is unfortunate that President Trump chose to make this monumental announcement at the start of the hurricane season. It is a double whammy for those of us in South Florida as we begin to commemorate the 25th anniversary of Hurricane Andrew.  Of course, those who survived Andrew, Wilma, Katrina and other hurricanes, as well as Sandy and the countless floods and tornadoes of the last 25 years should be particularly concerned.  I have written about sea-level rise before (see HERE, HERE and HERE). Local governments are making strong efforts to combat the effects of climate change.  The US withdrawal from the Paris Accord is unifying state and local leaders to take leading roles in combatting the causes of climate change.  This is might be the only positive result of the president’s decision.  But hopefully, it will encourage the president to reverse course.  The US should be leading the battle against climate change.

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