If you’re paying close attention to the changes being brought forward by our new administration, you likely know that the U.S. Senate and House of Representatives have begun the process of reconciling the differences between their new tax bills. If you’re a real estate investor or thinking of just selling your personal home soon, you may be wondering what the new tax bills will mean for the future of your finances.
So, what exactly will the new tax situation mean for homeowners and both residential and commercial real estate investors?
Favoring Real Estate Investment Trusts
When looking at the benefits of the new tax bills, they largely favor the commercial sector and real estate investment trusts over individual residential homeowners; however, some of the benefits reaped by the commercial sector may be offset by the introduction of higher interest rates. Time will tell.
Property Tax Deductions
Because the House and Senate are hashing out the different versions of the bill, it’s hard to say exactly where some of the conditions will fall. When it comes to mortgage and property tax deductions, the House will cap the deductions at $500,000 down from $1 million while the Senate’s bill would cause no change in the current cap but would eliminate them for home equity loans. Both would allow for deductions on property taxes of up to $10,000.
Changes in Estate Tax
While this applies more to the estate owners than the investors, the Senate’s tax bill would double the federal estate tax exemption levels. Currently there is a 50 percent tax on estates worth more than $5.49 million for individuals, and nearly $11 million for married couples. The House bill remains largely the same except for its call to repeal the estate tax altogether in 2024.
One of the changes most likely to affect real estate investors, especially those making many investments over time, is the pass-through tax deductions. Many developers and investors across the country already work as LLCs or under official partnerships, and this change will likely continue to encourage that approach.
The House version of the bill caps the pass-through rate at 25 percent which is a drop in the current 39.6 percent. The Senate version would allow these pass-through businesses to exclude 22.4 percent of their income from taxes. This also applies to REITs (real estate investment trusts).
What does that mean for investors? They may be more likely to form LLCs or partnerships to benefit from the deduction. This increase in tax cuts will be a huge benefit for investors already using pass-through entities.
Corporate Tax and Depreciation Cuts
When it comes to the new tax bills, corporations and commercial entities will continue to win out. As far as corporate tax cuts, both the Senate and the House will cut the rates from 35 to 20 percent with the House version happening just slightly before the Senate.
As for commercial properties, the Senate will shorten the depreciable life from 39 to 25 years. That means that commercial property owners will be able to benefit from deductions much faster than they previously could which shelters more of their income from taxes.
The Time to Be in Commercial Real Estate
With the new tax bills creating change for the real estate industry as a whole, the groups that will benefit most from the change are real estate investors, especially formed as their own entity, and commercial real estate professionals or owners. Right now may be the perfect time to sell your home to a reputable investor that will be looking to take property off your hands amidst this changing environment.