Last month, the LANDTHINK Pulse posed the following question to our audience: What impact will the 2017 tax reform law have on the number of transactions and dollars invested in land real estate in 2018?
Our informal online survey revealed that 32.67% of respondents believe that the tax reform package will have a “Very Positive” effect on the land real estate market. President Donald Trump signed the sweeping Republican tax reform bill into law last December, the first major legislative victory of his presidency. It’s the most significant overhaul to the tax code since 1986, and it’s expected to lower tax bills for most American households. In response to the White House tax overhaul, major American corporations, including Walmart, Starbucks, Boeing, AT&T, Comcast and Cisco Systems have announced bonuses, wage increases, and better benefits for their employees. The new tax law slashed the federal corporate tax rate from 35% to 21% and includes a provision that allows a one-time repatriation of overseas corporate cash, an incentive for companies to bring money into the U.S over the long term.
It will take time to feel the full impact of the tax bill on the real estate industry, but most land investors, farmers, and ranchers can rest easy with the final tax bill. There are several key provisions that many believe will be a net positive for the land sector of the market. Here’s a quick look:
1031 (Like-kind) Exchange: No other provision directly affects the land industry more than the 1031 Exchange. Under the new tax bill, sellers may continue to defer gain on a property, if they reinvest the proceeds from the property sale in a qualifying, like-kind exchange. The 1031 exchange has been a part of the tax code since 1921, and the boost it brings to the economy clearly supports its over 100-year-old existence. However, the new tax law repeals 1031 exchanges for all other types of property that are not real property. 1031 exchanges on collectibles, aircraft, heavy equipment, machinery, etc. will no longer be a tax-free event.
Land professionals agree that the 1031 Exchange makes for a more buoyant real estate market. Many investors utilize the 1031 exchange, since the deferral of the capital gain tax gives them significantly more purchasing power and encourages their continual exchange of assets, since they don’t take a big tax hit.
Estate Tax: Also know as the Death Tax or Inheritance Tax, this is a federal tax imposed on the transfer of assets and property (including real estate, cash, and stocks) upon death. Under the new tax law, the federal estate tax exemption rates double to $11.2 million per individual ($22.4 million for married couples) in 2018. Many consider this a big win for agriculture, since farmers and ranchers are most strongly impacted by the death tax. When the family business is transferred to the next generation, often land and equipment has to be sold in order to pay the hefty taxes that are owed on the estate. When forced to sell farmland and equipment that’s vital to operations, productivity and efficiently is hindered, making the farms no longer economically viable.
President Trump has always advocated the preservation of family-owned businesses, stating the estate tax is “a horrible weapon that has destroyed many families”. This change marks significant progress in the fight to eliminate the Death Tax from the tax code entirely.
Lower Rates for Pass-Through Businesses, Individuals, and Corporations: The newly added tax provision allows owners of certain pass-throughs a 20% deduction on taxable income. This applies to owners of real estate via partnerships or LLCs and investors in both public and private real estate funds. The last minute addition will yield a significant tax savings for commercial land real estate investors and increase demand for commercial properties. Also beneficial to commercial investors is the Section 179 deduction for depreciation. Under the 179 revision, owners of commercial real estate could qualify for an immediate tax write-off for improvements. Farmers will also be allowed to immediately write off capital purchases up to $1 million.
The majority of our audience believe that the land real estate industry will prosper under the GOP tax bill. It was the general consensus of the LANDTHINK audience (32.67%) that the tax reform bill would impact the land industry in a VERY POSITIVE way. Coming in second, by a very close margin, was 31.33%, who expected to see a SOMEWHAT POSITIVE impact on the land market as a result of the reform package. Many (20.67%) hold the opinion that the land real estate market won’t be affected at all by the changes in U.S. tax law. Only 8.67% disagreed, believing that the tax cuts would have a SOMEWHAT NEGATIVE impact on the amount of money invested in land and the number of closed transactions. A mere 6.67% indicated the tax bill would have a VERY NEGATIVE overall effect on the industry.
Based on the results, the new tax code ushers in an increased optimism among land investors, professionals and enthusiasts. The tax reform is set to provide wealth creation and protection, improve the economy, and increase wages and employment- at least in the short term. These are all factors that fuel the real estate market.
President Trump is heavily invested in the real estate space, and with a real estate developer making the decisions in the Oval Office, it seems safe to say that the interests of the entire real estate industry is being well-represented in the White House.
While not everyone is happy with the new tax reform bill, I think we can all agree with President Trump on one thing- his sentiment on land. In an excerpt from his pre-election LANDTHINK article titled What Could a Donald Trump Presidency Mean for the Land Market?, Jonathan Goode, with Southeastern Land Group, shared with us President Trump’s thoughts on land:
In an interview with Anthony Licata for Field and Stream and Outdoor Life in January 2016, Donald Trump shared a sentiment all of us would agree with, “We have to be great stewards of this land. This is magnificent land. And we have to be great stewards of this land.” You can say that again, Mr. President.
Here’s how the results panned out:
We were pleased with the large number of Pulse responses, and we thank everyone who answered the Pulse and shared it on social media with friends and connections in the land industry. LANDTHINK would like to extend a big thank thank you to American Forest Management for sponsoring the January Pulse and for coming up with a very interesting question to pose to our audience. American Forest Management has been helping landowners manage, sell, buy, improve, and enjoy millions of acres of land for over 50 years.
Become a Pulse sponsor! It’s a great way to ensure your brokerage is the first one buyers and sellers call when they have a need to buy or sell property. You’ll get insane exposure on Social + Email + Web. That’s 500,000+ monthly eyes on you! Once you have it, you won’t want to give it up! Pulse sponsorships are offered on a first come first serve basis and are subject to certain limitations. If your business would be interested in sponsoring the March Pulse question, please contact us soon.
Do you have a suggestion for next month’s Pulse question? Submit your question and we might choose yours!
We want to know what you think about our February Pulse question, chosen and sponsored by Southeastern Land Group: Based on the recent record highs in the stock market, how likely are you to invest in land real estate? Answer now.
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