How will the tax bill impact Miami Real Estate?
December 8, 2017The United States Senate approved last Saturday, December 2nd, the tax reform advocated by President Donald Trump, which represents the largest tax reform since the 1980s, but also a significant increase in the US fiscal deficit.
The bill was approved with 51 votes in favor, all from Republican senators, and 49 opponents, almost all of them Democrats. The U.S. Senate is expected to reconcile the text approved with their House of Representatives, who approved a separate version of the bill with some differences, before Trump could sanction the reform. The law that comes out of this negotiation between the two houses is scheduled to go through a new vote.
The National Association of Realtors (NAR) has been actively releasing information regarding the proposals and its effects on homeowners, home prices and the real estate industry, however, it’s necessary to make state-by-state analysis, since home prices, economic growth, and population varies.
Recently the NAR President, Elizabeth Mendenhall, said: “The tax incentives to own a home are baked into the overall value of homes in every state and territory across the country, when those incentives are nullified in the way this bill provides, our estimates show that home values stand to fall by an average of more than 10 percent, and even greater in high-cost areas.”
Tax Reform – Key Multifamily Issues
Protect flow-through entities / REIT structure retains full business interest deduction
Ensure depreciation rules and avoid harming real estate while maintaining like-kind exchanges
Preserve carried interest
Income
Current Law Treatment of Business Income
- Flow-through entity: 39.6 percent max rate
- Individual: 39.6 percent max rate (effective at $418,400 single filers / $470,700 married couples)
- Corporate: 35 percent max rate
House Tax Reform Bill
- Active Investor in Flow-through Entity: 30 percent of income taxed at 25% rate with higher percentage available
- Passive Investor in Flow-through Entity: 25 percent max rate
- Individual: 39.6 percent max rate (effective at $500,000 individuals / $1 million married couples)
- Corporate: 20 percent max rate
Senate Tax Reform Bill
- Flow-through entity: 23 percent deduction (29.6 percent max rate) limited to 50% of allocable wages
- Individual: 38.5 percent max rate (effective at $500,000 individuals / $1 million married couples)
- Corporate: 20 percent max rate
Business Interest
Current Law
- Interest fully deductible
House Tax Reform Bill
- Interest fully deductible for real estate
Senate Tax Reform Bill
- Real estate companies may elect to maintain full deductibility of interest
Depreciation
Current Law
- Depreciation of Structures: 27.5 years
- Depreciation of Other Property: Bonus depreciation through 2019 / MACRS
House Tax Reform Bill
- Depreciation of Structures: 27.5 years
- Depreciation of Other Property Held by Real Estate Firm: MACRS
Senate Tax Reform Bill
- Depreciation of Structures: 30 years for firms maintaining full interest deductibility
- Depreciation of Structures: 25 years for firms accepting haircut on full interest deductibility
- Depreciation of Other Property Held by Real Estate Firm: Full Expensing (through 2022), Bonus depreciation thereafter
Carried Interest
Current Law
- Carried Interest: Capital gain if asset held for at least one year
House Tax Reform Bill
- Carried Interest: Capital gain if asset held for at least three years
Senate Tax Reform Bill
- Carried Interest: Capital gain if asset held for at least three years
Estate Tax
Current Law
- Exemption: $5.49 million individual / $10.98 million married couple
- Top Rate: 40%
- Basis Rule: Step up
House Tax Reform Bill
- Exemption: Doubled in 2018 (Tax Repealed in 2025)
- Top Rate: 40%
- Basis Rule: Step up (before and after repeal)
Senate Tax Reform Bill
- Exemption: Doubled in 2018 (Provision reverts to current law in 2026)
- Top Rate: 40%
- Basis Rule: Step up
The breakdown of NAR examination can be seen in this link.
