Real estate has been a very popular growth option available to investors in the US. However, with the tax reform bill proposed by President Donald Trump set to be implemented, the market is going to be stirred up one way or another.
According to critics, the tax reform is blatantly designed to benefit property developers more than anything else. In a way, the new bill will differentiate these firms as “pass-through” entities. As such, they can pass their profits through their owners first before being subjected to corporate tax. Thus, they can report such profit as personal income and would pay individual tax on it.
Under Trump’s tax plan, real estate developers will be able to manipulate tax rates through a series of policy changes and deductions. They could only pay lesser amounts for taxes than they should have. They will also be incentivized to keep their properties in good condition by making deductions on the costs of repairs and deduct interest payments from their income. Bottom line is, property value can be depreciated and deducted from their income quicker than before.
While being able to under-report income and run certain areas of a business off the book provide a significant advantage to everyone involved in trading real estate, this will also encourage property flipping. As more investors flip real estate, this will ultimately lead to a bubble, and prices would crash if left uncontrolled.
Nonetheless, these discrepancies could also stimulate the real estate market in some ways.
Most apparently, the tax reform will make 2018 a better time to invest in properties. As real estate profitability improves, the demand to purchase houses and commercial buildings will also begin to rise. As a result, there will be a surge in activity among suppliers and builders as they try to meet the demand for construction.
Although there will be a risk of oversupply and a high chance of overbuilding to get incentivized, there will be a large flow of money going into the real estate market.
Home depots are also expected to grow at a high rate due to heightened activities in real estate construction.
Theoretically, overhauling the existing tax code in the way the House and Senate Republicans want it will cause a bubble in property prices and encourage flippers to exploit the real estate market. Be that as it may, the reform is also believed to stimulate positive activities.
It is just a matter of lessening the potential of abuse within some aspects of the bill and attracting new entrants to the industry without attracting speculators. If the bill succeeds in these areas, the real estate market will definitely grow at a healthy rate.
Besides, sources said that Members of Congress are closing in to reconcile key “pass-through” issues for real estate firms. According to a report by New York’s trusted source of real estate news, the Real Deal:
“The House had passed a 25 percent top tax rate for some pass-through income (considered by legislators to be 30 percent of a qualifying company’s total income). Real estate investors would see that as a boon.”
As long as the government is able to strike a balance between incentivizing competition with tax deductions, as well as preventing certain aspects of the new tax code to be abused, the market will be able to experience healthy growth in the years to come.
Read more: How Will the New Tax Law Affect Real Estate?