Complex legislation often generates some negative as well as positive developments. This is exemplified by the results of tinkering with the Tax Code in two major tax reform efforts a generation apart.
The Tax Reform Act of 1986, for instance, has been blamed for the slump in the real estate industry immediately following its enactment. Changes in the code that contributed to this are generally cited as the introduction of the passive loss limitation rules, the increase in the capital gains rate, and the increased period for depreciating real estate.
“The Tax Reform Act of 1986 was a blow to commercial real estate, because it ushered in the passive loss limitation rules, which decimated the viability of real estate tax shelters,” said Marvin Kirsner, a shareholder at law firm Greenberg Traurig. “This was a major factor in the failure of many banks and savings and loan institutions, which in turn, resulted in a downturn in commercial real estate values.”
“The Tax Cuts and Jobs Act, on the other hand has given a boost to commercial real estate with Section 199A,” said Kirsner. “However, the boost might not be as great if single-tenant triple-net lease deals are denied ‘trade or business’ status so that they can benefit from the 20 percent deduction.”
Certain segments of the housing market have been negatively affected by some TCJA provisions, Kirsner noted. “The $10,000 cap on SALT deductions, coupled with the reduction from $1 million to $750,000 on the amount of a mortgage on which interest can be deducted, have had negative effects on the middle to upper market, depending on which area of the country you’re in,” he said.
“But what is really hurting the housing industry at the low to middle segment of the market is the near doubling of the standard deduction to $24,000,” he said. ”Although this has simplified filing taxes for a large percentage of families, it is eliminating what has been tax policy for many decades, which was to encourage people to buy rather than rent. The doubling of the standard deduction has largely eliminated the incentive for first-time home buyers at the lower end of the market. This benefit has helped many families build wealth by increasing home values and amortization of mortgage principal over the years.”
Kirsner cited a 2018 study by Zillow that estimated that the increase in the standard deduction reduces the number of home sales where the buyer could benefit from the “buy versus rent” benefit from 44 percent of home sales to 14 percent.
In fact, there is a demand for new single-family homes being purchased by home rental companies, Kirsner observed: “Even though single families may not be buying as many homes, builders are now selling to home rental companies. A large part of that reason is the TCJA.”
“This is a new segment of the market for home developers,” he noted. “They are purchasing hundreds of homes in new subdivisions in order to rent them out. These are homes that otherwise might have been purchased by families,” he said.
Although this is slated to revert back to pre-TCJA law in 2026, there is a chance that individual provisions of the act could be extended, Kirsner suggested.
Eventually, removing the incentive to purchase is a bad policy, according to Kirsner. “For decades it has incentivised the purchase of homes and has helped families build wealth,” he said. “The National Association of Realtors was lobbying very hard against it. Opposing the doubling of the standard deduction was a hard sell because it benefits a lot of people who now won’t have to itemize, but it’s hurt the lower end of the market,” he observed.
At the same time, the upper middle market is hurt in certain states by the $10,000 SALT cap and the reduction in the amount of mortgage interest that is eligible for a deduction, he indicated. “That leaves only a small segment in the middle that is not being negatively affected by the increased standard deduction, the limitation on the SALT deduction and the reduction in deductible mortgage interest.”
