Congress’s H.R. 1, the “Tax Cuts and Jobs Act,” passed on November 16th and it is now up to the Senate to vote on this bill. According to the New York Times, Republican party leaders are hoping to bring it to the Senate floor by this Friday. While the rental housing industry has been relatively optimistic about this bill, provisions (like the removal of private activity bonds within the low-income housing tax credit) raise concerns.
Within the House bill, the National Apartment Association comments that there are three provisions that could make drastic changes. These include:
- The reducing of marginal income tax rates, specifically for multifamily firms.
Multifamily firms could see a portion of business income taxed at 25%.
- The changing of carried interest capital gains treatment.
The bill sets a three-year holding period on these gains.
- Private activity bonds (or PABs) are eliminated from the Low-Income Housing Tax Credit (LIHTC)
This would impact the 4% credit, and the association worries that this removal will impede the industry’s ability to use this tax credit to produce affordable rental homes. In their letter to NAA members, they predicted this can affect low-income housing by as much as 50% per year.
The Senate bill reduces tax rates on individuals, and under the current proposal “individuals could take a 17.4% deduction on a portion of pass-through income.” Corporate tax rates are cut permanently.
Aside from a few provisions, many key tax code provisions have been left unscathed. Fortune predicts that the new tax plan will result in “lower home ownership levels, with more people opting to rent rather than purchase a home.” This means your rental property might be at an even higher demand. Although they insist that rental rates could see a decline due to the tax benefits provided to owners, this will vary by market, especially when many cities already have a high rental demand with a low stock of affordable housing. However, with legislation aiming at enacting rent control in multiple states, only time will tell how the rental market fares.
Moving forward, make sure you use a trusted tenant screening provider to vet the influx of rental applicants.
How do you think the new tax plan will affect your rental property?