For the past 3 months, we have been focusing on potential changes to the tax code that could impact the economy in general, and the commercial real estate market, specifically.
In our last post, we discussed the importance of playing the occasional game of “what if” and looking at things yet to happen as if they already had as an aid to evaluating your investment strategy. The week before we talked about looking at things from a high altitude perspective so that we see how the various components of our lives, both personal and business, are working together to serve our best interests.
This week we look at things from yet another angle, all in the hopes of helping you be certain that your investment strategy (at least the commercial real estate side of it is concerned) is optimized for maximum performance.
The term cognitive dissonance came to mind as we discussed things amongst ourselves. We looked it up and found that term has a rather broad definition, but this summed it up best for us: A mismatch between your beliefs and your actions that can lead to feelings of discomfort and coping choices that may have negative impacts.
In a way, cognitive dissonance is about making excuses for not taking an action you believe is in your self-interest. Think of all the reasons you’ve given yourself through the years for delaying action on something you knew needed your attention. If you are anything at all like us, it won’t take you long to come up with a few examples that still give you that sick feeling in your gut as if whatever happened did so yesterday, even if it is years in the past.
With all this in mind, let’s take the topic of taxes, especially as they relate to your real estate investments. President Biden ran on a platform of raising taxes. Just a few of his proposals include a hike on corporate and personal income tax rates, taxing capital gains as ordinary income, eliminating 1031 exchange rules, drastically lowering the estate tax threshold and tossing the step-up rule that is ubiquitous in the estate-planning world.
Now, let’s get a show of hands; how many of you think that with over $30 trillion in national debt, over $2 trillion in annual budget deficits and record-setting federal stimulus spending, that taxes will go down or even stay the same? We’re guessing that very few hands went up. Ours didn’t, either.
If you believe, as we do, that taxes will be going up, not taking some kind of action related to your investment portfolio is where the cognitive dissonance concept comes in. You may say “I’ll wait a while to see what happens”, or “I don’t have a better place to put my money if I sell my real estate”, or “prices are still going up and I don’t want to miss out on an even bigger gain”, or “I refuse to cash out and pay all that tax”. These are the coping thoughts and behaviors that can lead to a negative impact.
This is not to say that everyone should sell because taxes are likely to go up. Tax law is just one aspect of real estate investing, and there could be several sound reasons for you to maintain a portfolio of commercial real estate even if taxes move higher. That said, the majority of building owners we speak with every day either don’t have a real estate strategy that fits their unique situation, or they don’t have a plan at all. With millions of dollars in equity at stake, that is counter-intuitive and, at the very least, a good example of cognitive dissonance in the first-degree.
So, the next time you get that weird feeling in your gut that you should be paying closer attention to a potential change in your circumstances, heed the warning and let it be your call to action. If you decide to maintain the status quo after analyzing your personal situation against the backdrop of current and projected market conditions, great. That is an action in itself and at least your decision to stand pat will be informed.
However, if you decide to access your equity, you will have to take affirmative action to do so through a sale, exchange or financing event. Equity in real estate is illiquid compared to stocks and bonds. The process, even in today’s fast-paced market, still takes months to complete and as we’ve all seen in the past year, things can change in a hurry.
If there’s anything we can do to help, just give us a call. We look forward to hearing from you.