On April 26th, 2017, the Trump administration released a first draft of its proposed tax reform plan. The outline includes a considerable corporate tax cut of 15% applicable to all businesses – from mom-and-pop local retail stores to large conglomerates.
The rate shift is the big headline and is of course significant to any landlord operating under one or more LLC’s; however, there is an additional item contained in the plan that is of particular interest to the real estate sector and is causing a bit of a stir.
The tax code in question is the Home Mortgage Interest Deduction. If you’re unfamiliar with the deduction, it allows homeowners to reduce their taxable income by the amount of interest paid on their mortgage (applicable to a home value of up to $1.1 million). This can be a substantial figure and is seen as a major incentive for home-ownership (it can only be applied to personal residences).
The Trump administration has promised to protect the deduction, yet William Brown, President of the National Association of Realtors (NAR) has called the plan a “non-starter.” So what’s the deal?
The point of contention only indirectly relates to the home ownership deduction. Included in the tax reform plan is a proposal to double the standard deduction available to individuals. The fear from realtors is that the added incentive of buying a home for tax deductible purposes is mitigated by the increase in standard deduction. In other words, if the average deduction available from the home ownership clause is around, say, $12,000, but everyone already receives a standardized deduction close to or equal that amount, there’s no added incentive to purchase a home. As a result, home buying demand will reduce and the individual value of homes will go down.
What Do the Tax Cuts Mean For Landlords?
Realtors are understandably skeptical, but for landlords, this is predominantly good news. Firstly, less incentive to purchase a home means more renters on the market and therefore more demand for rental properties. Additionally, if there is less demand among home owners, potential rental property investments, particularly those targeted by small-to-mid-sized, local and independent landlords, will see a price reduction. So if you’re considering expanding your portfolio, you may want to hold off and wait for the expected benefits.
That being said, the tax proposal is in its initial stages and is expected to receive feedback and revisions over the course of the next few months. Stay with us for more updates.