How will the Tax Cut and Jobs Act affect real estate investment and development?

Now that the “Tax Cut and Jobs Act” (TCJA) is the law of the land in the USA, we begin the challenge of figuring out how it will affect real estate investment and development. Key changes in the tax code affecting real estate, include:

• more favorable treatment of pass through income benefitting income property owners
• shrinking income tax deductions for mortgage interest rates, which will increase the cost of home ownership for some tax payers
• reduction in the deductibility of state and local taxes, which will affect the cost of owning higher value homes
• a doubling of the standard deduction, which will reduce the number of tax payers whose cost of homeownership would be reduced via the remaining mortgage interest and state and local tax deductions
• a reduction in the tax loss benefits of Low Income Housing Tax Credit investments due to the reduction in the corporate tax rate, which could decrease capital available for affordable housing development.

Since the TCJA reduces tax incentives for consumption of ownership housing, it could reduce demand for such housing  And if the TCJA leads to higher interest rates due to a substantial increase in the federal budget deficit as forecast by the non-partisan Tax Policy Center ($1.23 trillion by 2027), it could further increase the cost of homeownership and reduce purchases of ownership housing.

Gregg Logan of the real estate advisory firm of RCLCO notes that deficit growth may result in cuts to the federal budget, particularly to programs such as Medicare and Medicaid. This could influence the depth of demand for independent living, assisted living, and active adult retirement real estate, because reductions in these programs would affect the disposable income of most older Americans.

A longer-term question is what, if any, effect the TCJA will have on the form of metropolitan regions in the United States. It reduces tax incentives for consumption of ownership housing, most of which is located in the lower density sprawling suburbs of the metropolitan regions of the USA. But it is unclear as to whether the reductions in home ownership contained in the TCJA will be sufficient to offset other factors, such as school quality, that have attracted families with children to lower density suburbs for more than seven decades.

The Tax Foundation has provided a summary of the TCJA and estimated its impact on the economy. See their report entitled “Preliminary Details and Analysis of the Tax Cuts and Jobs Act.”