What the Tax Reform Act Could Mean for Multifamily Investors in 2018

By: Zack North

Now that President Trump has signed the new Tax Reform Act, a number of interested parties are pouring through the bill’s numerous provisions to gauge its possible impact on the U.S. economy.

While it will take years to fully gauge such an impact, the push to encourage the flow of private capital into U.S. real estate has made one thing clear: the Tax Reform Act was structured with the needs of commercial and multifamily real estate investors in mind.

3 Ways The Tax Reform Act Could Impact Multifamily Investors in 2018

If you’re looking to invest in a multifamily property, many of the provisions in the new bill could have a significant positive impact on your overall return.

Here are 3 ways the new bill directly affects multifamily real estate investors.  Keep in mind that the bill has only just been signed, and that the actual impact of these provisions remains to be seen.

1. Certain Limited Liability Companies (LLC) see an increased benefit

If you choose to invest in a commercial multifamily property, you will likely form an LLC to avoid being taxed at the business level.  Then, your taxes on generated income would show up on your personal tax return.

With the signing of the new Tax Reform Act, you may now be eligible to deduct up to 20% of qualified business-related income from pass-through entities such as LLCs, subject to certain limits and restrictions.

For example, let’s say you own (through a LLC) a small apartment building that generates $500,000 within a given year.  If you are eligible for the full 20% deduction, you would not pay taxes on $100,000 of that income.

This change is perhaps the primary reason why industry leaders are calling the new bill a major win for commercial real estate investors.

2. Prospective homeowners may prefer to rent as prices fluctuate

A general increase in the standard deduction for both married and single Americans may remove some of the tax deduction incentive for purchasing a home.

This change may lead to more prospective homeowners choosing to rent as they take the pulse of the new real estate market in their area.  In that case, owners of multifamily properties would see an increase in rental demand.

3. The depreciation period for multifamily properties has been reduced

The depreciation period for investors of multifamily properties was previously capped at 27.5 years.  That period has now been reduced to 25 years, meaning that investors are positioned to receive greater annual deductions in a shorter tax span.

 

It is also worth highlighting an aspect of the new bill that did undergo a major change.  The 1031 exchange rules are still in effect, allowing investors to defer capital gains by reinvesting sale proceeds into another “like-kind” property.

As mentioned earlier, it will take time to see the full impact this new bill has on the U.S. economy.  It must also be noted that the majority of the new provisions are not permanent and can be extended or overhauled in 10 years.

Still, experts seem to agree that there are clear financial benefits for investors of commercial and multifamily real estate.

If you’re looking to invest in a multifamily property, Commercial Direct, a division of Silver Hill Funding, LLC, can help.  Visit our Loan Customizer to see how you can fully design a fully-customized financing request that meets your unique needs.

Author: Zack North

Zack North is the Director of Marketing for Commercial Direct.  As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.

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