President Trump is scheduled to make a big announcement about his tax plan later this week. No details have been released, but the president’s tweets about the announcements have been filled with his trademark superlatives. One thing is for certain. The Trump tax plan will affect real estate. The question is, however, whether the real estate developer in chief’s proposals will benefit the real estate industry. Signals, so far, indicate that they will even though such moves might be contrary to the president’s own tax policy.
The biggest issue affecting real estate is the mortgage interest deduction. President Trump has stated several times that he does not intend to eliminate this popular deduction for business or for homeowners. For homeowners, supporters of the deduction have always argued that it is designed to encourage homeownership by making the cost of homes more affordable. However, the opposite is true. The deduction targets the wealthy who are already homeowners and, it is regressive. It does not reach low and moderate income workers. The National Low Income Housing Coalition supports reducing the tax break from $1,000,000 to $500,000 and changing the deduction to a credit. This would allow 15 million more low and moderate income borrowers to get a tax break.
On the business side, the White House has also signaled that it is considering changing the rules regarding expensing (deductibility) of capital expenditures. The tentative proposal would allow the immediate expensing of capital expenditures. Coupled with the continuance of deductibility of mortgage interest, this would allow double dipping. A borrower could borrow large sums of money for capital improvements and deduct 100% of the cost of the improvements that same year instead of depreciating the cost over the life of the improvements. And, the borrower could deduct the interest over the life of the loan as paid. the cost to the federal budget under this plan would be staggering and contrary to all of the president’s stated budgetary goals.
Another real estate tax provision which could be changed in the Trump proposal, but so far, has not been discussed, is the provision allowing for “active” real estate investors to offset real estate losses against other income. President Trump has been very successful at this strategy according to the 1995 tax returns that were released to the press late last month. Elimination of this provision would have a net positive affect on the budget.
Finally, the president has not commented on the future of 1031 like-kind exchanges. This is popular method used by real estate developers and investors which allows the deferrals of capital gains upon the sale of real property by substituting a new property upon the sale of a property. real estate love it.
Tax reform is not an easy job. There is so much more to is than politicians and the media want us to believe or allow us to understand. More importantly, it is so much more than setting tax rates and debating whether to continue capital gains tax. To have meaningful tax reform, the president and Congress must look at the entire tax code and put aside their own self interests. While selfishly, I would love to make real estate the best place to invest money from a tax stand point, it would be foolish and naïve to think that creating a separate code for real estate investors is best for our overall economy.