Trump Tax Plan Continues to Raise Questions About Real Estate Impact

In the aftermath of his speech in Detroit on his economic and tax policies, analysts are raising additional questions regarding the impact of presidential candidate Donald Trump’s proposals on the real estate industry. Initially, critics voiced concerns that Trump’s plan would allow the improper use of pass-through entities to avoid paying higher ordinary income tax rates on wages and salaries (See NAIOP Source, August 16, 2016). Last week, the Wall Street Journal reported Trump’s tax proposals could potentially result in a substantial, if perhaps unintended, benefit to highly leveraged real estate firms.

Trump’s plan would call for allowing an immediate tax write-off, otherwise known as full expensing, for investments in equipment and buildings. Current law requires depreciation – deducting the cost of the investment from taxes owed over a set period of years. However, tax proposals that adopt full expensing also eliminate the deductibility of interest on business debt. Otherwise, a business could borrow heavily to purchase assets, immediately get a tax write-off to offset any payment of income taxes it owes, then deduct the interest on the borrowed amount for the term of the loan. The result, according to tax analysts, would essentially be negative income rates – resulting in a federal subsidy for the activity.

House Republicans have embraced full expensing in their tax reform blueprint, but included elimination of business interest deductibility (See NAIOP Source June 28, 2016). As quoted in the Wall Street Journal, Trump’s economic advisors said he did not want to eliminate interest deductibility, but that they were still working on the particular details of the expensing proposal so that it would be used with new investment and not for purchases of existing real estate portfolios.

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