Effects of New Tax Reform on Retail, Multifamily, and 1031 Exchanges in Commercial Real Estate
With the new tax reform bill signed into law on December 22nd, 2017, commercial real estate lenders agents and investors continue to monitor and analyze exactly how it will impact different sectors in the industry. Although potential changes initially concerned many commercial real estate experts, both retail and multifamily sectors will instead see major benefits in 2018 and beyond. Here’s what you need to know about how the Tax Cuts and Jobs Act will impact your commercial real estate investment.
How Changes Impact The Commercial Retail Sector
Thanks to a lower commercial tax rate (from 35% to 21%), many expect to see a major boost to retail investment. According to Colliers Chief U.S. Economist Andrew Nelson, “Retailers traditionally pay a high corporate tax rate because they don’t have the same kind of deductions as other sectors.” Lowering the corporate tax rate will give retail a needed boost, particularly when considering that other sectors have benefitted from deductions while glossing over retailers.
Other experts believe changes in the individual tax code will be a catalyst for retail growth in 2018. Due to the fact that some consumers will receive larger paychecks under the new tax law, many retailers hope to see increased spending this year. With the potential for more consumers, a larger pool of retailers will have the opportunity to rent out larger commercial properties or purchase a commercial property outright. The estimated growth in the commercial retail sector will give investors a greater chance for a nice return on investment (ROI).
How Changes Impact The Multifamily Sector
Although slightly counterintuitive, the negative effects on individual homeownership will actually benefit owners of multifamily complexes. According to Zillow, the new tax reform plan will lower the total number of those willing to itemize their deductions and take advantage of a mortgage interest deduction. Previous to the tax bill, approximately 44 percent of homes in the United States took advantage of this deduction. With the new tax law in place, households that benefit from this deduction drops to 14.4%.
But why would these deductions help commercial property investors and owners? By lowering the appeal of homeownership across the nation, many first-time homebuyers will discover that leasing in multifamily buildings like apartments, flats, and condos will be to their financial benefit. According to a recent interview with John Change, Vice President of research services at Marcus and Millichap, “Increasing the standard deduction to $24,000 for married couples and $12,000 for individuals and capping the deduction on combined property, sales and state income taxes to $10,000 lowers the incentive to itemize deductions.” Without these deductions, many experts predict that potential homeowners will instead opt back into the rental market. By having more competition for multifamily properties, owners can widen the net on their renter base, allowing them to find higher quality tenants and increase rental rates.
Commercial real estate investors will also be happy to hear that new tax rules may help them achieve higher after-tax yields in comparison to other options. With more potential investors, the commercial real estate industry may see an increase to its total capital.
Saving The 1031 Exchange: A Gift To Commercial Real Estate Investment
For residential and commercial real estate investors, 1031 exchanges act as crucial drivers of real estate activity in the United States. A 1031 exchange allows an owner of investment property (not a primary residential property) to sell it and purchase a “like kind” property of equal or lesser value. These properties can differ in grade and quality, giving investors an opportunity to exchange old property for something with a greater ROI.
Most importantly, 1031 exchanges allow property owners to defer any taxes on capital gains by shifting these gains from one property to the next.
Thus, 1031 exchanges contribute significantly towards commercial real estate investment activity. Keeping 1031 exchanges provides relief to worried experts who initially believed that the tax reform bill might do away with this Internal Revenue Code. The final tax bill opted to keep 1031 exchanges on the table, keeping this real estate strategy in practice.
In general, the new tax reform law appears to help retail and multifamily sectors. Some may want to take a “wait and see” approach on the law’s impact, but on paper, it appears to benefit these commercial sectors and allow for additional growth, capital and activity.
Understanding New Investment Policies
Are you looking to invest in commercial retail or multifamily properties? Do you have questions about whether you might be eligible for a 1031 exchange this tax year? Contact the experienced lenders at Hunt Mortgage Group to benefit your investment portfolio today.