The Trump administration’s move to roll back capital gains taxes is intended to boost investment throughout the country, but not everyone is sure it will have the desired effect — particularly when it comes to real estate investment. President Donald Trump has directed Treasury Secretary Steven Mnuchin to explore adjusting the way capital gains taxes are calculated for inflation, potentially shedding at least $100B in tax revenue over the next 10 years, the New York Times reports. Currently, the price a seller pays for an asset is subtracted from the amount it nets in a sale to calculate the tax, without any adjustments.
Trump and Mnuchin want to calculate the initial cost of the asset with present-day inflation added when calculating the tax, and a study by the University of Pennsylvania’s Wharton School of Business estimates that two-thirds of the savings of the change would affect only the top 0.1% of American income earners. Such changes to the tax code normally go through Congress, but the Trump administration is attempting to circumvent that process.
Critics worry the change in code could give wealthy, high net worth individuals further unfair advantage, since only those with the capital to hold a significant amount of stocks or real estate would see tangible savings. Senate Democratic Leader Chuck Schumer called the move an “outrage,” and the Times said it would likely be challenged in court.
As for how this tax break would impact the industry, Quantum Real Estate Advisors President Chad Firsel is optimistic that it could spur increased investment in commercial real estate, though he said such activity could come at the cost of 1031 exchanges — wherein a property seller reinvests their proceeds into similar assets to defer capital gains taxes.
“I think it will absolutely stimulate sales in our market,” Firsel told Bisnow. “There is a higher probability that [investors] will sell, and I think it will stimulate trade, as opposed to people holding or buying assets that they don’t want to buy [in 1031 exchanges] because they’re afraid of capital gains taxes.”
Others predict the tax break will neither make investors less inclined to put their money in property nor more inclined to keep cash on hand.
“People put stuff in real estate to get appreciation, and they’ll still do that. There still isn’t much of a better place to put money than real estate,” Ernst Valery Investments founder Ernst Valery said. “The sophisticated investor has a formula to balance their portfolio, and I don’t think this factors in.”
As economist Jared Bernstein wrote in The Washington Post, multiple studies have been conducted into capital gains taxes that all came to the same conclusion as Valery. Historically, capital gains tax changes have had no measurable impact on the economy as a whole.
The tax policy that the GOP succeeded in pushing through has had a sizable impact on the industry, though not particularly due to the tax cuts on the wealthy. Rather, the creation of opportunity zones for development has spurred interest from the real estate community.
“Investors are looking for opportunity zones now,” Valery said. “I get called every day by people asking to go into Opportunity Zones, so it is driving interest.”
One element of the new tax law that might have been overlooked is the extension of the required holding period for assets passed to fund managers to three years from one year in order to avoid a higher capital gains tax rate. The change could decrease investment activity in the short term as property owners seek to avoid higher tax rates, Firsel said.
“The three-year carried interest for capital gains is a negative for us,” Firsel said. “But once the three years are up, as opposed to them being on the fence about selling, you’ll see a lot more sellers because there’s not as much uncertainty about capital gains [if the new policy is passed].”