With Donald Trump set to be sworn in as the 45th president on Jan. 20 – and despite his extensive background as a real estate developer – many in the industry are expressing concern about possible changes in the tax code. A Wall Street Journal article sums up well the potential changes and their implications for real estate investors.
The article noted that a sweeping blueprint for overhauling most of U.S. tax law made in June by House Republicans “appears to have a better chance with a Republican in the Oval Office.” Among its most concerning provisions:
- Eliminating for all businesses the current deduction for debt interest payments. The Journal explains that “leverage has long played a major role in most acquisitions of office buildings, stores, hotels and other commercial property in part because interest payments are tax deductible.”
- Eliminating depreciation on commercial real estate. Tax law currently allows buyers of rental apartment buildings to depreciate the cost over 27.5 years and other commercial real estate over 39 years. But the House plan would, according to the Journal, “eliminate depreciation for real estate companies as well as other businesses. Instead, buyers of real estate would be able to treat the entire cost of buying a property—excluding land—as a business expense that could be used to reduce income. If a buyer didn’t have enough income in the year they bought the building, they could be able to carry the expense forward into future years as a net operating loss.”
This is of significant concern because it is unclear how elimination of depreciation would be phased in. The Journal quoted real estate industry officials that “investors who bought properties recently on the assumption that current law would apply might face big losses if all of a sudden they lost their depreciation tax benefits.”
Jeffrey DeBoer, chief executive of the Real Estate Roundtable, may have summed it up best with one of the first understatements of 2017: “The transition rules are really, really critical.”