How Recent Tax Proposals May Affect Commercial Real Estate Investors and What To Do About It

The recent tax bills that have been considered by Congress provide several changes to the way deductions and tax rates work for a number of different entities. The result can be confusing, because some of the changes are designed to provide tax relief to very specific kinds of investment corporations, and understanding where your business falls is essential to understanding whether these tax proposals will help or hurt your bottom line.

The big item that a lot of discussion focuses around is the tax break provided to pass-through corporations. This provision is written very specifically to apply to capital investment companies, which makes it great for real estate investors. It does have exclusions that keep most small business operators from taking advantage of it, though, so doctors, lawyers, and freelance service providers will not be able to use the break. It also only applies to individuals who are paying more than 25 percent of their income in taxes. Many estimates state that this excludes 86 percent of all otherwise qualifying pass-through businesses as well, making the number of investors who can benefit from this provision quite small.

The other provision that is going to affect real estate investment most is the change to the mortgage deduction limit. This drastic downward revision in all versions of these tax proposals will affect just about every investor who relies on traditional financing for large investment purchases, and it has the mortgage and real estate industries mobilized. If the downward revision to the deduction is approved, it could cut the amount real estate investors can deduct in mortgage interest in half, and that affects the bottom line of much of the industry.

Many provisions in the tax code for real estate are thankfully untouched, including the 1031 Like-Kind exchange provisions. This means these changes to the mortgage interest deduction and the reduced pass-through income rate represent the largest upheavals real estate investors can expect to experience.

With the vote to approve the proposals in both the House and the Senate, it is now clear that despite the large impact on one of the most vital investment sectors in the financial industry, a bill that combines these aspects of the various tax proposals considered over the last few months is headed to the President’s desk. The question now is, what can small investors do to prepare themselves? For starters, it will be important to find new ways to finance properties that provide the savings that the mortgage interest deduction used to provide to investors affected by the cut. From there, it’s a matter of watching the market to see how it reacts.

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