Special March 2018 Update: The Great Tax Race

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Tax Reform in High SALT States: Is the Whole Greater Than the Sum of the Parts for CRE?

The recently enacted tax reform legislation (the Tax Cuts and Jobs Act or “TCJA”) was an attempt both to lower taxes and to broaden the tax base in a number of ways to compensate for tax cuts. There is a tendency to focus on the change in tax liability from a single provision in isolation rather than to look at the tax reform law as a whole, due in part to the complexity of the varied and countervailing provisions within the law. Nonetheless, it is absolutely necessary when examining tax reform to focus on the net effects. The best examples of this are the limitations of state and local tax (SALT) and mortgage interest deductions (MID) and their impact on taxpayers and communities, particularly in higher tax, higher income areas. This report details the implications in California, New York and other markets.

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Special January 2018 Update: Based on the approved Tax Cut and Jobs Act of 2017

Commercial real estate, overall, is a winner and largely exempt from the most significant adverse provisions, namely limitations on interest deduction and 1031x repeals. The proposed tax changes could prompt a flurry of restructuring, with a period of transition and market flux as investors restructure to optimize tax outcomes and markets readjust. History suggests that changes in tax laws, by themselves, are often not a key driver for CRE investment decisions.

Key Takeaways

  • Expect a moderate positive impact on multifamily/renting economics, retail, and industrial and a minimal effect on office.
  • States like California, New York, and New Jersey are likely to be affected, yet negative impacts could be counteracted by robust, underlying real estate fundamentals and job growth in these markets.
  • Real estate investors benefit—some more than others—and much depends on which version of the bill passes.

Read more detailed analysis of the plans – including an interactive map of which cities would be most heavily impacted by the change to residential real estate taxes.