AgentAnalysis

Trump’s tax reform plan is a mixed bag for real estate

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Before the parsing, pissing and politicalization of President Trump’s nine-page tax reform proposal gets hot and heavy, here are some essential features that might help or hurt real estate. You can read the entire plan here. You can find a good rundown here from Business Insider. A more in depth report from Inman can be found here.

Warning: much of the proposal is still somewhat vague. For example, will there be a higher tax bracket for the super rich (beyond the proposal for a top rate of 35 percent)?

Here are the three brackets in the proposal:

  • A bottom individual tax rate of 12 percent. This a bump from the current rate of 10 percent but people currently in the 15 percent marginal tax bracket would go in here and so in effect see a tax cut. Plus, the standard deduction would increase to $12,000 for individuals and $24,000 for married couples. This would ease the blow for those paying 10 percent today.
  • A middle tax bracket of 25 percent. But there is no definition of what the middle is.
  • The top individual tax rate is 35 percent. The current top rate is 39.6 percent.

The plan also references a fourth, higher bracket. No percentage is attached to this proposal, but it seems to be Trump’s way of handling his campaign promise of not lowering taxes for the rich.

While the plan eliminates most itemized deductions, it purportedly plans to protect part of the mortgage interest deduction and charitable write-offs.

But the plan wipes out state and local tax deductions, which could hurt high-cost areas like New York and California, and would put an end to homeowners deducting their property taxes.

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The plan wipes out the death tax, and offers good and bad news for small business, which will affect brokers and agents.

For example, a 25 percent rate is proposed for pass-through businesses, which means that instead of getting taxed as an individual for business profits, small companies will be taxed at this new rate, which should be lower for many businesses.

But the plan also calls for the elimination of some business deductions, it does not specify which ones. The plan is silent on real estate depreciation and 1031 exchanges.

Finally, overseas assets from US-owned companies would be repatriated and taxed at a one-time lower rate, expected to be 10 percent versus as high as 39.5 percent today. Apple, Microsoft and Google alone are hoarding nearly $500 billion overseas. Some of this money might find its way into the luxury housing market, new businesses and the stock market.

Earlier this year, NAR dumped on the three bracket plan and concluded it would hurt homeowners, even with the safeguards for the mortgage interest deduction.

According to an Inman report at the time, NAR and big-four accounting firm PwC concluded:

“An illustrative comprehensive tax reform option that would lower and consolidate marginal tax rates to three rates with a top rate of 33 percent, double the standard deduction, eliminate all itemized deductions other than charitable contributions and mortgage interest, eliminate personal exemptions, eliminate the Alternative Minimum Tax, and cap the tax rate on pass-through business income at 25 percent.”

All of these changes were proposed in the “Better Way” blueprint and can also be found in Trump’s tax reform proposal.

The President’s promise:

“Too many in our country are shut out of the dynamism of the US economy, which has led to the justifiable feeling that the system is rigged against hard working Americans. With significant and meaningful tax reform and relief, we will create a fairer system that levels the playing field and extends economic opportunities to American workers, small businesses, and middle-income families.”

Now, the horse trading begins.

Email Brad Inman.