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18 Tax Reform
2017 NMHC Research Forum April 5-6, 2017 It’s been a long me… October 22, 1986 Charles Rangel ? Daniel Moynihan Robert Byrd ? Jack Kemp James Baker Donald Regan Dick Gephardt Bob Dole Dan Rostenkowski John Stennis …this tax act was just an absolute catastrophe for the country, for the real estate Ac ve-passive -- you're absolutely right industry. Not everyone was happy -- a hundred percent right, and something has to be done. It has to be brought back. if you're a den st, and you're making 200 or $300,000 a year, and -- you can't invest now in real estate. The reason the stock market is ar ficially high, in my opinion, is there's no other form of investment.
…by having cut the high income tax rates to 25 percent, as an example, people don't have the incen ve any more to invest. They're saying, "Why should I take a chance on inves ng in low or moderate-income housing? I might as well just pay the Donald Trump, November 21, 1991 tax." Sanger, Sirmans & Turnbull (Land Economics, 1990) Kemp bill find effects on introduced REITS. Senate Finance Commi ee passes tax reform bill TRUMP’S POSITION IN 1991
Real estate investment is virtuous because it has • a high multiplier • positive externalities
Incentives are justified • high tax rates • depreciation, ability to use losses
Adjust depreciation schedules to produce the right mix of real estate Simple model of tax reform and real estate c = cash-on-cash return c =cash low/downpaymentcash flow =NOI −iLP −tax t = tax rate downpayment = P(1-L) L = leverage rate (loan as % of price) i = interest rate tax =t(NOI −iLP −��/� ) n = loan amor za on length B = frac on of price in building D = years on deprecia on schedule c =NOI −iLP−t(��� −��� −��/� )/�(1−�) P = Price
�=(1−�)���/(1−�)�+(1−�)��−��/� If tax < 0 then P increases with t 2017 TAX REFORM
Lower marginal rates
Immediate expensing of investment • House blueprint: all investment (except land) • Trump plan: election, only for manufacturing businesses
End deductibility of net interest expense • House blueprint: all investment • Trump plan: election for manufacturing
Possible end of 1031 exchanges
2017 TAX REFORM Efects of proposals • Interest deductibility is relatively minor • Combo of rapid depreciation & ability to take losses is major • Real estate professional status could be lucrative
Quick Dep Int Ded Passive Limit Gap 1 1 0 46% Unlikely 1 0 0 31% Possible 0 1 0 -3% Possible 0 1 1 -3% Now 1 0 1 -4% Likely 1 1 1 -4% Unlikely 0 0 0 -7% Unlikely 0 0 1 -7% Unlikely 1031 EXCHANGES
Ling & Petrova – 10% decrease in commercial real estate prices
I find around 4% for apartments with normal leverage
Higher leverage increases the value of exchanges
OTHER POTENTIAL CHANGES
Cost segregation
Estate tax repeal, eliminate basis step-up
Real estate professional status Tax pass-through entities
Senator Boies Penrose (R-PA)
“I believe in the division of labor. You send us to Congress; we pass laws under which you make money...and out of your profits, you further contribute to our campaign funds to send us back again to pass more laws to enable you to make more money."