Will Residential Real Estate Be Down and Commercial Up Due to the New Tax Plan?

George Schultze has an article in Forbes about the Christmas Tax Plan, Investing After A Christmas Tax Gift, that shares some of the changes coming with the new tax plan.

A new income tax rate cap of 25% for pass through entities (such as LP’s and LLC’s). However, this doesn’t apply to certain businesses (like hedge funds and other service businesses) and phases out for larger companies. Having said that, it will benefit manufacturers, real estate investment companies and certain other industries.

Mortgage interest deduction will be capped at $1 MM for future home purchases.

From a quick look, it seems like commercial real estate stands to potentially gain significantly, and residential could see a bump in the road with the lowering of the mortgage deduction.

Update: Dan Kern in U.S. News & World Report has some interesting insights into how the tax plan changes could effect real estate.

How the Tax Plan Affects Investments

Changes to taxation of pass-through organizations such as LLCs and S corporations are among the most complex aspects of the tax bill. Pass-through entities will receive favorable tax treatment, helping manufacturing and real estate organizations, however, law firms, medical practices, consultants and investment managers are among the entities that won’t be able to take advantage of the beneficial tax treatment of pass-through income.

The increase in the standard deduction will limit the number of households that choose to itemize deductions, which will reduce the financial incentive to buy a home rather than rent.

Expensive real estate markets in high tax states such as California, New York, New Jersey, Connecticut and Massachusetts will see declining demand as a consequence of caps on mortgage interest deductibility and severe reductions in the deductibility of state and local taxes. Reduced supply of homes for sale in those markets may provide a partial offset for the demand loss, as current homeowners may be less likely to sell given the tax changes.