Ultimately, the tax reform bill benefits multifamily real estate investing. Employees are incentivized by the Tax Cuts and Jobs Act to relocate where they can receive greater value for their money and to prefer rental housing over home ownership. Private investors can hide more profits in real estate funds, while residential and mixed-use complexes can maintain their tax benefits.
Investors and business magazines have started inquiring with us in reaction to the law regarding real estate and the tax revisions. The influence of the new tax legislation on individual real estate investors was examined in a previous article. Here are four core effects of the Tax Cuts and Jobs Act (TCJA) on multifamily real estate that deserve more examination:
- Reduced taxes will alter house preferences
All taxpayers now receive a standard deduction of $12,000 for individuals and $24,000 for married couples, almost double the prior amount. The advantage may be mitigated by new limits on homeowners’ real estate tax deductions. Tax deductions for homebuyers are no longer limitless; as of January 1, 2019, homeowners who refinance their mortgages can only deduct interest on a principal balance of $750,000. (Deduction limits are unchanged for existing loans). $10,000 is the maximum amount of state and local taxes, including property taxes.
Multifamily housing is helped by the combination of a greater standard deduction and reduced mortgage deductions. The rule encourages renters to relocate to higher and/or better apartments rather than becoming homeowners by removing the incentive for growing families to purchase a home for its tax benefits, like deductions on mortgage interest or property taxes.
According to Bloomberg, the new tax reform has made renting more appealing to Millennials just out of college or starting families than owning. These Millennials like to live in suburban areas that are urbanizing and have excellent schools, parks, and other amenities. They avoid paying property taxes for these perks by renting. According Reis Inc, a real estate research firm., one-third or fewer taxpayers claim their deductions in cities such as Austin, Dallas, Denver, and Houston. Reis anticipates continuing multifamily housing growth in areas like these, where taxes are low and rental demand is high.
According to Moody’s Analytics, housing prices will consequently become less affordable in high-tax areas like California, New Jersey, and New York. Fewer purchasers will be drawn to the market in these states, which will slow the value of homes and increase rental rates, particularly in affluent suburbs, urban cores, and infill neighborhoods.
- The pass-through reform benefits real estate investment trusts
Pass-through corporations like S companies and LLCs are used in the bulk of real estate deals involving private equity. Profits are distributed at regular tax rates to the partners’ tax obligations. The shareholders of these companies are now able to deduct 20% of their commercial revenue thanks to the 2017 tax adjustment. According to The Wall Street Journal, even though there are still several complicated restrictions that apply to pass-through income, investors in real estate stand to gain from this aspect of the new tax law.
For single filers, this benefit phases out at $157,500; for married taxpayers filing separately, it phases out at $315,000. However, the truth is that private real estate fund investors will be able to defer paying taxes on 20% of their profits, balancing other types of income on their tax returns. The highest individual tax rate is reduced to 37% under the 2017 tax legislation, while the income requirements for the higher tax bands are increased.
- Real estate corporations continue to benefit from hefty write-offs
The top corporation rate of 21% will favor multifamily enterprises that are not constituted as partnerships. Most firms may only reduce interest by 30%, although Reis points out that landowners can still write off the entire sum of their commercial mortgage interest.
A wide range of depreciation options is also available to landlords, including 100% instant expense for real estate used before 2023. In the opinion of the National Multifamily Housing Council and other industry associations, these corporate perks help advance the apartment industry. They ought to encourage further value-added real estate developments that boost the market value of multifamily properties.
- Growth in real estate will be fueled by more jobs
Employment market shifts benefit real estate investment in states with lower taxes like North Carolina and Texas and in transportation hubs like Atlanta, Dallas, and cities like Chicago, where the City and surrounding people may choose to rent in large numbers. If the tax cuts are successful in generating new employment, there will be a need for office space and multifamily housing for workers. Blue-collar employees in a variety of industries will reportedly get tax relief, according to a Business Insider study.
All taxpayers will, in the end, have more cash to spend on leases and other expenses over the next seven years. All personal income tax breaks will end in 2025. However, most tax changes that are advantageous to multifamily real estate do not phase out, notably the limits on the mortgage and local tax deductions. The tax cuts are expected to benefit multifamily real estate and its investors when combined with a strong employment market and other workplace trends.
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