Tax plan crowns a big winner: Trump’s industry
As Tax Reform moves forward it is clear that Commercial Real Estate will be an even more attractive asset class. Some things that look baked in include the continuation of 1031 tax free exchanges, some sort of reduced tax rate on "pass through" entity income (which comprise all of our deals), and likely accelerated depreciation on retail investments from 39 years to maybe 25 years. All of these changes will enhance the returns of future deals - still unsure about how many of these will be retroactive or not.
From the Article:
The real estate industry ended up with an even more generous depreciation timetable, allowing owners to shelter more income.
And in a break from previous practice, rental and mortgage-interest income qualifies for a lower tax rate, the kind of special treatment traditionally reserved for long-term capital gains and certain qualified dividends.
"Real estate does great," said Daniel N. Shaviro, a professor of taxation at New York University Law School, who as a congressional staff member helped write the 1986 tax overhaul. "It's hard to imagine what they might have asked for that they don't have."
Real estate investment trusts, known as REITs, have extra cause for celebration. They are companies that make money by owning, financing and operating real estate. Both the Trump Organization and Kushner Companies, the family real estate firm partly owned by Mr. Kushner, have important deals with such trusts.
A REIT functions like a mutual fund, but instead of assembling a portfolio of stocks, it allows people to invest in a bundle of real estate assets, both buildings and mortgages. More important is the way they are taxed. They pay no separate business tax and instead are required to pass along virtually all of their taxable income to shareholders, who pay the tax when they file individual returns.
The Republican proposals sharply lower the top tax rate on the income that REITs and other businesses pass through to their owners and shareholders. Currently, those investors must pay taxes on that income at rates as high as 39.6 percent. Under the Senate provision, it would drop to 29.6 percent. (The House bill drops the rate even lower, to 25 percent.)
That's a big savings, and a big advantage. Those receiving mortgage-interest income outside a REIT would have to pay taxes based on ordinary rates.