A few of the leading questions swirling around tax reform in regards to commercial real estate, and some thoughts on how owners, asset managers, buyers, and more can be preparing for the future of commercial real estate.
Though no new tax reform legislation has even cleared a committee in either the House or the Senate, just the possibility of an overhaul of our income tax system may have already had a big economic impact.
To be sure, the Trump Bump has sent stocks soaring, but the increase is speculative, as action has been limited to a handful of executive orders in the first few weeks of the new administration.
In our last couple of posts, we took a look at The Better Way tax proposal developed by a group of GOP legislators. Some of the provisions are quite controversial and a few would be game changers if enacted. The debate is just getting underway and nobody knows how things will turn out.
Though it’s early, we have been giving tax reform a lot of thought in our effort to understand its potential impact on commercial real estate values and the decision making process. In that effort, we have come to just one conclusion that we are sure of:
Real estate decisions have already been influenced and that will continue until long after the final legislation is passed.
The dialogue has changed to “what will happen if” and real estate investors, asset managers and brokers will be burning the midnight oil on the topic for the foreseeable future. They are all wondering what would happen to property values and transaction activity if depreciation as we know it disappeared, if interest expense was no longer deductible, if estate and gift taxes were eliminated or if capital gains tax rates were reduced. It’s kind of a long list, actually.
If you are one of those who is following the tax issue closely, how are your daily business decisions being influenced by the possibility that tax rules may change? Are you more motivated to take affirmative action or are you inclined to apply the brakes and hold off on your next deal?
How will new expensing rules on business equipment impact the need for space? Will business owners choose to go on a buying spree to ramp up their operations or will they sit on their hands and let the other guys go first to test the new rules?
Will we see a lull in activity leading up to new tax law implementation, or will we see a flurry activity instead? How will the balance of supply and demand change? Will new rules precipitate a correction in one of the longest bull markets in history or send it further into record territory?
The questions go on and on, but you get the point:
Your decisions are already being affected based on your belief that change of some kind is possible.
Institutional investors and asset managers are probably busy playing with some new assumptions on their latest Argus runs.
Owner/users who occupy highly-appreciated assets may be thinking about selling sooner rather than later just in case the new law has a negative effect on property prices.
Potential buyers may not be willing to pay that record-high price for a new building, but be more inclined to invest in new equipment because they might be able to fully expense it in year one.
Those in estate planning mode are most definitely figuring in the prospect of no estate or gift taxes.
Those looking at refinancing their buildings are probably in a hurry no matter what new law gets passed because rates are already moving higher.
Those that have been thinking about exchanging into another asset to defer taxes may be inclined to hold off on your down-leg sale, just in case the capital gains tax rate comes down enough to justify cashing out.
There are too many scenarios and too many potential outcomes to contemplate in a single blog post, but our goal is to stimulate your thinking about how the future of tax reform legislation will impact your wealth.
After all, you earned it and we want you to keep as much of it as possible. With that in mind, we would welcome the opportunity to sit down with you to discuss the impact of the current tax proposal on your real estate strategy. Change is a catalyst for new opportunity, but it also poses new risks.
So, this might be the right time to play a serious game of “what if” before talk of tax reform becomes real tax reform. Give us a call. We are here to help.