Owning property in high-tax states like Illinois could hurt a little bit more for landlords, if Congress and President Trump approve tax overhaul legislation under consideration in Washington.
That's the main conclusion of a recent report assessing the impact of one proposed change under the tax plans: a sharp reduction of the deductibility of state and local taxes. The new limits will shrink the disposable income of well-paid taxpayers in Illinois, New York and other states, causing some to move to lower-tax locales, according to the report released Dec. 4 by Green Street Advisors, a Newport Beach, Calif.-based research firm.
Over the long run, the out-migration could depress demand for commercial real estate in high-tax states, especially for apartments and retail properties, the report says.
"This change equates to a major, and unprecedented, increase in effective state and local tax rates in high-tax markets, which tips the scales for the long-term competitiveness of those cities relative to low-tax markets," says Green Street, which specializes in researching real estate investment trusts.
Real estate investors often gripe about Illinois and Chicago's high taxes and perilous fiscal status, though they'vemade out wellover the last several years as rents and property values have risen. The problem is that the state is losing residents, and population growth is a key driver of demand for real estate.
The Green Street report focuses on the relationship between rising tax rates and the population of high-income residents. Since Illinois hiked income taxes in 2010, the number of residents with adjusted incomes of $200,000 or higher has fallen 1.8 percent annually, the most among six other states that have raised taxes over the same time period, according to the report.
Limiting state and local tax deductions will have a similar effect to a tax increase for high-earning residents.
"The negative impact in high-tax markets will be felt immediately in the form of lower disposable income, which has direct consequences for the apartment and retail sectors," the report says.
Green Street estimates that Illinois taxpayers in the top tax bracket will suffer a 3 percent decline in disposable income if the deductibility limits pass. That will encourage wealthy people to move to lower-tax states; it means fewer people will shop at high-end malls or rent in luxury apartment buildings, the report says.
Under current Senate and House tax plans, the federal government would no longer allow taxpayers to deduct state and local income and sales taxes from their income. The plan would also cap property tax deductions at $10,000. Not surprisingly, lawmakers in high-tax states, many of them Democrats, oppose the changes.
"Many of the states adversely affected by the changes to the (state and local tax) deduction are in poor fiscal health," Green Street says. "An exodus of high-income individuals could hasten their fiscal death spirals, hindering the outlook for long-term growth."
CHICAGO STANDS TO LOSE
Green Street identifies Chicago as a loser under the deductibility limits, but says the changes will hurt more in places like New York City, Los Angeles, San Francisco and Washington. Seattle will be the biggest winner, followed by Miami, Austin, Dallas and Houston.
The deductibility issue notwithstanding, many commercial real estate investors have reason to be pleased with—or at least relieved by—the tax reform proposals, according to a report from Deutsche Bank. That's because the Senate and House bills currently under consideration don't take away key tax benefits that investors have enjoyed for a long time, like the deductibility of interest and tax deferrals on property sales.
"We view the bills as an unequivocal win for CRE investors, since the proposed changes considered big risks to the commercial property sector were not changed," the report says.
Author:Jon Wise Phone: 312-287-8362 Dated: December 8th 2017 Views: 144 About Jon: Jon P. Wise believes customer service is a priority in building a successful business. He strives to...
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