Fewer Tax Brackets and Lower Corporate Taxes – How Trump’s Tax Reform Plan Will Affect Real Estate Investors (Part I)
He made a promise on the campaign trail to cut taxes for individuals and businesses alike—and last week, the Trump administration unveiled a tax reform plan that would do just that. Treasury Secretary Steven Mnunchin and National Economic Director Gary Cohn briefed reporters on the plan at the White House earlier this week. Although details about the plan remain sparse, real estate investors should be cautiously optimistic about what’s known about the plan so far.
In this 3-part guide, we provide a rundown of the proposed changes, as well as a recap of how we believe the changes may affect real estate investors.
Consolidates tax brackets from seven to just three (10%, 25%, 35%).
Generally speaking, this seems like a good thing. It will certainly simplify things for everyone who files. But in terms of impact on real estate investors, we do not believe this change will have a major impact one way or another.
Reduces corporate taxes from 35% to 15%.
The U.S. corporate tax rate is currently the highest in the industrialized world, which some say has caused a massive exodus of U.S. companies to lower-tax nations. Reducing the corporate tax rate to 15% would make it one of the lowest in the world. The goal is to incentivize companies to come back home.
Again, we don’t see this change as having a major impact on real estate investors specifically. But on the whole, it seems like good policy to incentivize businesses to stay in the U.S. where they can grow jobs and strengthen the national economy. A strong economy usually translates into a healthy housing market.
Applies a 15% tax rate to “pass-through” businesses.
President Trump wants to be sure small businesses and professional organizations receive the same tax treatment as corporations—and that means lowering taxes for “pass-through” businesses, as well.
This would really benefit real estate investors. Pass-through businesses include everything from barber shops to hedge funds, as well as LLCs created to invest in real estate. Some say that President Trump is pushing for this change for his own benefit; he has more than 500 pass-through entities that contain his real estate holdings. In any event, reducing the pass-through tax rate (which is up to 39.6% per year on the high end) will certainly benefit landlords, real estate investors and other real estate-related professional service companies.
On the whole, we see these proposed changes as being relatively beneficial to real estate investors. Stay tuned for Part II and Part III of this series, in which we look at other tax reform provisions and how those might impact the future of real estate.