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The New Republican Tax Reform Plan

November 29, 2017

 

The New Republican Tax Reform Plan

Real Estate Investors vs. Residential Home Buyers

Under the Republican’s comprehensive tax reform plan proposed earlier this month in the House and Senate, owners of commercial real estate (e.g. office buildings, retail centers, industrial properties) would benefit from lower taxes on their profits and would be able to avoid a 30% limit on deductions for interest expense, which would normally be imposed on non-real estate businesses. Furthermore, the Senate’s proposal would shorten the depreciation period for commercial real estate to 25 years from 39 years. More importantly, for commercial real estate investors who feared the worst, the new plan does not change the benefits provided by the "1031 Exchange" provisions, which allows real estate sellers to defer capital-gains taxes by reinvesting the proceeds in "like-kind" properties. These proposals would presumably have the effect of spurring real estate growth.

Unfortunately, other parts of the tax reform proposal—the biggest since President Reagan’s era—does not fare well for the residential real estate industry. First, the proposal eliminates the key tax incentive of homeownership by reducing the limit on the deduction for residential mortgage debt to $500,000 from $1 million. The proposal further hurts homeowners by eliminating the federal deduction of State and local income and property taxes. In areas with high property taxes, like Nassau and Suffolk Counties, or high income taxes like New York City, the tax reform plan would negatively impact home sales, and in turn impact brokers and builders of residential real estate.

Whether the positive effects of the proposal outweigh the negative effects remains to be seen. It can be argued that the proposal benefits real estate investors at the expense of homeowners.

The information provided in this article is not intended as and should not be used as tax advice.

Jonathan Mottahedeh, Esq.

Robert Bichoupan, Esq.

 

 

 

 

 

 

Prior results do not guarantee a similar outcome. All information posted is general advice only, based upon the rules of NYS, and is not intended to be a substitute for personal legal advice. Although information provided here was accurate as of the date of posting, laws change frequently and rules in other jurisdictions may differ. Therefore, readers should not rely upon these postings but should consult an attorney to discuss their specific factual situation.

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