Trump Tax Plans: Commercial Real Estate and the Trump Administration

The Trump Administration: How Donald Trump’s presidency may impact commercial real estate taxes, property value, and economic growth.

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Well, we knew things were going to get interesting.

But like most of the political experts and pollsters, we were completely caught out by Trump’s stunning victory.

Apparently, Yogi Berra’s genius is still with us, as the election lent new meaning to his phrase “it ain’t over til it’s over”.

So, now we have President Elect Trump, and we begin the process of adjusting to the new administration and taking a hard look at how his campaign proposals, if enacted, will impact the commercial real estate market.

In our last post, we focused entirely on Hillary Clinton’s plans to change capital gains tax treatment and rules governing like-kind exchanges. We must admit that we are relieved to know that those proposals are off the table, as any one of them could have had profound negative impact on the real estate business.

What Level of Change Can We Expect?

Whenever a new President takes office, expectations for change run high. This election was no different, as many promises were made by both candidates.

For those of us who have been through a few election cycles, we take most of those promises with a grain of salt. Our Founding Fathers built so many checks and balances into the federal decision making process that legislating major change is anything but easy. Their wisdom and foresight is nothing short of amazing.

Even though Republicans now control both chambers of Congress and the Executive Branch, it will still take 60 votes in the Senate to invoke the cloture rule to stop a filibuster.

The filibuster was created to stop a simple majority from having total control over the minority and also to encourage debate and compromise between opposing parties. It has been serving the minority party well for over 200 years. So, Democrats looking to block legislation proposed by the new majority will still have their say, and that is as it should be.

The Trump Administration

So, if we all agree that lowering income tax rates, building walls and renegotiating international trade deals are going to be tall orders to actually fill, what can we expect from the Trump administration? The answer is: no one knows.

However, we do know what his administration is not proposing and that may be even more important to real estate investors and business decision makers.

Mr. Trump, unlike his opponent, has no plan to raise income taxes, increase estate tax rates, limit like-kind exchanges, place a cap on tax-deferred gains or eliminate the step-up basis provision for those inheriting real estate. These facts decrease the overall level of uncertainty that has been on the rise in recent months as corporate earnings have been declining, job growth has been slowing and GDP growth has continued to disappoint.

All that on top of the fact that our central bankers have painted themselves into a corner by keeping interest rates near zero, leaving them short on tools to stimulate the economy if we slip into even the mildest of recessions. Not having to worry about higher taxes as well, can only be a good thing from our point of view.

Mr. Trump is promising lower corporate tax rates, lower personal income tax rates, a boost to infrastructure and defense spending, regulatory relief and a revamping of the Dodd-Frank banking regulations, all of which will be very difficult to make happen.

Deficits would spike, at least in the short term, and the growth rate of our national debt, currently at $19.6 Trillion, would accelerate. As another old saying goes: “Pretty soon it’s going to add up to some real money” and that may become more of a point of agreement on both sides of the political aisle going forward.

So, what does all this mean to the commercial real estate world? We think you can expect little to change in the near term. Whatever you were worried about before the election is still in play today.

Economic growth is still sluggish and corporate earnings remain a major point of concern. In Southern California, vacancy, supply and interest rates are still running at historic lows and companies continue their struggle to find quality space.

We recommend that you stay focused on your current challenges, but still keep an eye on what the Trump administration is able to accomplish. The good news is that the rules governing exchanges and the treatment of capital gains are not likely to change any time soon.

That’s a good thing.