While it’s difficult to know for sure what will be included in a final draft of a proposed tax reform plan, let alone one that is passed by Congress and approved by the president, we do have some clues about what may be included in the plan. As a result, we can make a few guesses about how the proposed plan might affect real estate crowdfunding (RECF) investments.
According to the Washington Examiner, the tax reform plan as it is envisioned right now consists of two parts – eliminating taxes and lower tax rates (first part) and eliminating tax breaks (second part). How each of these will affect RECF investors depends on the specifics, which haven’t been outlined yet. Here are some general observations.
How the Proposed Tax Reform Plan Can Affect Real Estate Crowdfunding
If plans to lower the corporate tax rate goes as planned, this would benefit institutional investors and corporations that invest in RECF. It could also benefit some RECF platforms depending on their business structure.
Both the GOP and President Trump propose to lower individual tax rates, but Trump wants to go lower than the GOP. Regardless of what is settled upon, individuals who save on federal taxes could have more to invest in RECF. Putting those investments into a self-directed IRA and re-investing them could compound to some excellent future growth.
However, the plan calls for reducing the current seven income tax brackets to only three. Since we don’t know where those income levels would fall, it’s possible that some people’s income taxes could go up under this provision. For instance, if the 33% tax bracket was rolled into the 35% bracket being proposed, a small percentage of taxpayers would see a tax increase, and that could affect their ability to invest in RECF.
Another provision in the tax reform plan is the elimination of itemized tax deductions. Real estate borrowers may be affected on this end. Those living in states that impose state income taxes, such as New York and California where there a lot of RECF companies, could be influenced on both ends— on the federal end and on the state side.
Interest payment deductibility for businesses has been a huge boon for businesses that operate on high debt. Companies that borrow a lot to undertake capital improvement projects, even purchasing real estate, could see their taxes go up. If they use debt-based real estate crowdfunding at all, then this provision can influence their business strategy. It will require business owners to get creative with how they structure RECF deals.
On the flip side, if companies can write off new investments immediately, then the previously mentioned downside could become a huge upside.
Why It’s Difficult To Know How Tax Reform Will Affect RECF
To be honest, it’s very difficult to know for sure just how tax reform will impact real estate crowdfunding investments. This article at Forbes explains why. Nevertheless, there are four sets of RECF taxpayers that will be impacted either in the positive or in the negative, but likely both. The only question for each set of taxpayers is, will it be a net positive or a net negative? At this point, no one can tell. Those three sets of taxpayers with regard to RECF are:
RECF deal borrowers – Deal borrowers are likely to be impacted by lost itemized deductions causing them to pay higher taxes. However, depending on the structure of their business, they could win or lose in other ways.
RECF investors – Investors will likely be affected most by the tax bracket they fit into. While the president and GOP leaders promise to reduce the taxes for most Americans, there is the possibility that some taxpayers will pay more.
Institutional investors – Institutional investors will likely benefit if they get the tax cuts promised by President Trump. They’ll benefit a little less if other GOP leaders get their way.
RECF platforms – What will determine whether RECF platforms and their owners/shareholders win or lose will be the net effect of all the reforms. If borrowers and investors see a net positive, then we’ll likely see more deals and the industry as a whole will do even better than it has the last couple of years.
As you can see, we are in a wait-and-hold pattern on tax reform. The word is taxes are going down for most taxpayers, corporate and individual, but no one knows by how much just yet.