The new tax laws do not appear to have a short term negative impact for investors. In fact it’s more likely a near term boom for investors. For one thing, if the now defunct homeowner mortgage interest deduction discourages new homebuyers, they’ll have to rent which has to be good for investors in apartments and single-family rentals. According to the Urban-Brookings Tax Policy Center mortgages and the capital gains exclusion apply to personal property, not the business of real estate investment. In fact, investors (businesses) are still able to deduct mortgage interest as a cost of conducting business (along with all of the normal and customary expenses).
There is a possibility the loss of the mortgage interest deduction could hamper fix and flip investors. But that’s unlikely considering the low inventory and pent up buyer demand. However, this isn’t likely to be universal in an industry that is all about location. Low to moderate cost markets are dominated by personal incomes that will benefit from the higher standard deduction and will no longer benefit by itemizing, which is typically triggered by mortgage interest and property tax deductions. The higher standard deduction will offset the loss of itemized deductions. However, there is the chance that the higher standard deduction will demotivate potential buyers that don’t take advantage of the long term investing that homeownership offers.
It’s the high income and high cost real estate markets that won’t benefit much from the higher standard deduction. High end markets could also suffer as a consequence of caps on mortgage interest deductibility and severe reductions in the deductibility of state, property, and local taxes.
Of general interest to real estate investors are changes to taxation of pass through business entities such as LLCs and S corporations. You’ll need an accountant to get this all straight but pass through entities will receive more favorable tax treatment. This should especially help the profitability of real estate and manufacturing businesses.
Longer term, these tax changes will have several unpredictable consequences. This tax package is designed to front load the U.S. economy. Historically, slow and steady growth has shown more sustainable prosperity that doesn’t overheat the economy. Too fast of growth results in a substantial increase in the demand for borrowed money. History also demonstrates that high borrower demand drives higher interest rates, which is never good for the real estate industry. Chances are interest rates will increase enough late in 2018 and into 2019 to significantly hamper real estate investing and the industry as a whole. Certainly the markets that are already hot won’t be sustainable if significant inflation is added to the mix.
The politics of the economy are far from finished. There was zero support by the Democrats for this tax bill. Whether the democrats return to power in 2018 or later, they will return to power at some time. Tax bills and policies are reversible. No one knows what that will bring.
The aging population also plays heavily into this complex mix. As was seen as a result of the Regan and George W. Bush tax cuts at the upper income levels, it doesn’t result in sustainable economic growth that off sets the predictable growth in the budget deficit. Unaddressed senior entitlements (hampered by the deficit) to Medicare and Social Security will continue dragging on the economy and tax policies.