- The Tax Cuts and Jobs Act has a new break for the owners of pass-through companies, including some real estate developers.
- Because it applies to income-generating properties, it could encourage developers to prioritise multifamily apartments over single-family houses, according to brokerage Redfin.
- There’s already a shortage of affordable single-family homes.
The Tax Cuts and Jobs Act awaiting President Donald Trump’s signature contains a big tax break for real estate investors.
Senate Republicans added it to the bill at the eleventh hour last week Friday to provide relief for owners of businesses that hold some depreciable assets like apartment buildings, shopping malls, and office parks.
The owners of so-called pass-through companies will get a 20% deduction on their income under the new law, with some restrictions. This was done to ensure that these entrepreneurs, who “pass through” their business profits to themselves (instead of through dividends, for example), aren’t paying disproportionately more than the 21% corporate tax rate public companies will have.
But what’s good for property owners may not be the same for the homebuyers in the long run, according to the real estate brokerage Redfin.
The housing market already faces a shortfall of affordable units. This tax break at the very least doesn’t improve the situation, and worse, could tighten supply, Redfin forecast.
Because apartment buildings generate income, developers may see the tax change as a new incentive to build these units instead of single-family houses, which are in short supply.
This has actually been the broad trend since the housing crisis plunged the value of single-family houses for homeowners and developers.
But in 2017, single-family housing construction picked up while multifamily new construction slowed. Permit issuance for single-family homes hit a new post-recession high in November, Census Bureau data showed on Wednesday, indicating that construction is set to continue picking up in the months ahead.
But according to Redfin, the tax change may incentivise apartment building again if real estate investors start focusing on income-generating properties.
Also, the pass-through tax break benefits leased office space, which may start to compete with housing development outside of city centres – the same places where many single-family homes are built, Redfin said.