By Peter Grant and Laura Kusisto
The real-estate industry has long known it would face a fight in 2017 about how federal tax law applies to commercial and residential property.
But it is beginning to shape up to be different from what many expected. Most had predicted Hillary Clinton would be in the White House, mounting an effort to use tax code changes to increase collections from big commercial property owners.
Instead Donald Trump is coming to town. And despite his extensive background as a real-estate developer, many in the industry are expressing concern about the seismic changes in the tax code that could be ushered in by his presidency for all businesses, including real estate.
During the campaign, President-elect Trumpproposed such measures as using tax policy to limit imports and boost U.S. manufacturing, but stayed silent on how the real-estate industry should be taxed. A spokeswoman for the Trump transition declined to comment on tax reform beyond what candidate Trump said during the campaign.
Still, real-estate executives say a sweeping blueprint for overhauling most of U.S. tax law made in June by House Republicans appears to have a better chance with a Republican in the Oval Office. The plan appears to be gaining traction, according to real-estate industry lobbyists who have been having extensive behind-the-scenes discussions about what it would mean for real estate.
"The House is ready to roll," said Jeffrey DeBoer, chief executive of the Real Estate Roundtable.
Among other things, the GOP blueprint calls for the elimination of the deduction for state and local property tax. Industry executives also worry the plan could severely cripple the mortgage interest deduction -- long considered a sacred cow of U.S. tax policy.
The blueprint proposal released in June said it would preserve the mortgage interest deduction. But it also would nearly double the standard deduction that taxpayers could receive, thus eliminating most itemized deductions. Mr. Trump proposed an even larger standard deduction.
"Because of the other provisions included in the new tax system, far fewer taxpayers will choose to itemize deductions," says the Better Way proposal released in June.
The upshot, real-estate industry leaders worry, would be that fewer people would be incentivized to purchase homes, which would weigh on demand and possibly the broader economy.
The House proposal also would eliminate for all businesses the current deduction for debt interest payments. Leverage has long played a major role in most acquisitions of office buildings, stores, hotels and other commercial property in part because interest payments are tax deductible.
Another sea change in commercial real estate would be in the way the House blueprint would affect depreciation. Tax law currently allows buyers of rental apartment buildings to depreciate the cost over 27.5 years and other commercial real estate over 39 years.
The House plan would eliminate depreciation for real-estate companies as well as other businesses. Instead, buyers of real estate would be able to treat the entire cost of buying a property -- excluding land -- as a business expense that could be used to reduce income. If a buyer didn't have enough income in the year they bought the building, they could be able to carry the expense forward into future years as a net operating loss.
Real-estate industry officials describe those proposals as "radical." They are concerned that, if not handled right, changes in tax law could warp the economics behind real estate, creating upheaval in the industry.
Industry officials said they are open to discussing ideas as long as their authors are motivated by creating jobs and not penalizing landlords. If a tax overhaul is successful in boosting the economy, landlords will benefit because businesses will be renting more office space and consumers will be spending more in hotels and stores.
"We're advocates for job creation and economic stimulation," said William Rudin, a major New York landlord and chairman of the Real Estate Roundtable. "We don't want to provide tax shelters."
Real-estate industry officials say they have been given assurances that precautions will be taken to make sure the Republican plan doesn't create loopholes that distort incentives for investing in real estate.
Still, officials said they are concerned about how such changes as the elimination of depreciation would be phased in. Investors who bought properties recently on the assumption that current law would apply might face big losses if all of a sudden they lost their depreciation tax benefits, industry officials said.
"The transition rules are really, really critical," Mr. DeBoer said.
--Richard Rubin contributed to this article.
Write to Peter Grant at firstname.lastname@example.org and Laura Kusisto at email@example.com
(END) Dow Jones Newswires
December 27, 2016 15:59 ET (20:59 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.