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Cushman & Wakefield Explains Impact of $1.5T Tax Reform Bill on CRE
The impact of proposed $1.5-trillion tax reform legislation on the U.S. commercial real estate sector is becoming clear, notes Cushman & Wakefield in a report titled, “The Great Tax Race.” The final version of the rewrite hinges on negotiations between the U.S. House of Representatives and Senate, which reached an agreement on a final bill this week.
Cushman & Wakefield’s Revathi Greenwood says CRE, overall, is a winner and largely exempt from the most significant adverse provisions, namely limitations on interest deduction and 1031x repeals. The proposed tax changes could prompt a flurry of restructuring, with a period of transition and market flux as investors restructure to optimize tax outcomes and markets readjust. History suggests that changes in tax laws, by themselves, are often not a key driver for CRE investment decisions.
Key Takeaways
– Expect a moderate positive impact on multifamily/renting economics, retail, and industrial and a minimal effect on office.
– States like California, New York, and New Jersey are likely to be affected, yet negative impacts could be counteracted by robust, underlying real estate fundamentals and job growth in these markets.
– Investment and capital markets: Passive investors in pass-through entities are likely to benefit substantially from lower rates under the House plan, but their eligibility for tax deductions is limited under the Senate proposal by wage provisions. REITs and publicly-traded partnerships, however, would be eligible for the full deduction without regard to the wage limitation. Should the Senate proposal be enacted, expect to see a shift over time towards REITs, as well as conversions to corporate structures.
– Office: Corporations will be big beneficiaries, likely seeing a net tax cut of $400 billion over 10 years. As currently constructed, the legislation likely will mitigate inversion and relocation risk for multinationals, which may boost office demand in the U.S.
– Retail: The U.S.’s high effective corporate tax rate challenges the retail sector and is thought to undermine retail’s international competitiveness, as well. A lower corporate rate might encourage foreign retailers to invest more in their U.S. operations, larger corporations and consumers with larger tax savings to spend more and retailers to invest additional capital in their own businesses and employees.
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