While we certainly cannot predict the future, our experience in the real estate industry provides some insight as to how the tax reform plan President Trump released last week will impact rental property investors.
In this final post in a three-part series, we look at how doubling the standard deduction and eliminating the 3.8% surcharge on investment income will affect real estate investors – a group of people who are monitoring the President’s proposal closely.
Doubles the standard deduction.
The current tax code allows any individual who does not itemize their deductions to take a “standard deduction”. In 2016, the standard deduction for an individual was $6,300. This would double to $12,600 under President Trump’s plan for tax reform.
How this change affects real estate investors seems to be a mixed-bag. Some argue that doubling the standard deduction removes the incentive to invest in real estate. National Association of Home Builders Chairman Granger MacDonald noted that “doubling the standard deduction could severely marginalize the mortgage interest deduction, which would reduce housing demand and lead to lower home values.”
While this may be true for individuals looking to buy their primary residence, doubling the standard deduction is unlikely to deter real estate investors from buying rental property. Investors with any sizable portfolio will likely exceed the threshold through deductions anyhow, thereby necessitating itemization. If anything, doubling the standard deduction may benefit landlords and real estate investors who may realize increased demand from renters (since the incentive to buy your primary residence may be lower).
Regarding lower home values: this would certainly hurt those who invested in real estate for appreciation, but this could also benefit real estate investors who had been priced out of expensive core markets such as the San Francisco Bay Area.
Removes the 3.8% surcharge on investment income.
In order to pay for the Affordable Care Act, the Obama Administration enacted a 3.8% surcharge on investment income. Trump’s tax reform plan would remove that surcharge, and would cap capital gains at 20% versus the nearly 40% that some tax brackets are subject to today.
On the whole, this seems to benefit real estate investors. Paying a lower capital gains tax is always a good thing, particularly for real estate investors who fix and flip properties.
The changes are seemingly positive for real estate investors. But there are still a lot of unknowns.
The plan released on Wednesday does not include any detail on what will happen to a number of key business tax deductions, including 1031-exchanges and “active investor” status. Investors are watching closely. A “blueprint” released by the House this past summer suggested eliminating all special interest tax deductions, so we’re on the edge of our seats wondering where President Trump will come down on these issues. As of now, we still remain in the dark.
But barring any major changes to the tax code other than what the Trump administration released earlier this week, we feel like the changes to the tax code could prove a boon for real estate investors. We will continue to monitor reform efforts as new details are released.