US Tax Storm To Send More Investors Running
US property investors are preparing for a major storm of taxes in 2018. This along with some major markets peaking in this cycle, could fuel even more exits, in favor of new destinations and more Canadians investing back home.
The 2018 Tax Tsunami
While the details are still being worked on by politicians, a wide spread of long loved tax breaks are expected to go away for American taxpayers, and real estate investors. This multi-pronged, multi-level hit could make a substantial difference in the benefits of investing in US property.
The argument is that a higher standard deduction for American taxpayers may offset the loss of these other breaks. Of course, as with any tax plan, investors have typically found that they wind up paying more, and new breaks are too complicated or limited for many to use.
Lost Tax Breaks
One of the most notable breaks expected to be lost is an offset for property taxes paid, when filing income taxes. In high cost areas like New York, this can easily mean $10,000 or more, per year, per unit. Often a lot more.
The loss of the mortgage interest deduction is another huge change for property investors. Many property owners have taken out mortgages, and have built portfolios with loans as leverage, specifically to take advantage of this tax deduction. They could go from saving to paying many more thousands per year, eroding much of the true net income investment properties offer.
Eliminating the ability to deduct state and local taxes on federal income tax returns could also place a huge additional financial burden on many as well.
Losing the Tax Base
Some US counties may soon be forced to raise property tax rates as well, as they lose residents. Data from City Lab and the US Census Bureau shows that many major metros have already been bleeding population counts. This may be partially due to the rise in freelancing and remote work, which has seen close to 50% of workers free themselves of being dependent on location for employment, as well as an an affordability crisis, which has sent many fleeing to cheaper places to live. With fewer immigrant workers, and lower occupancy rates, budget gaps may need to be filled by higher property tax rates. All of which can take a further bite out of net investment returns.
The loss of numerous tax breaks in the US, and potential for rising net taxes, could make American real estate less attractive in 2018. International investors may begin looking for other destinations to put their capital in. Canadians have already become some of the biggest sellers of US real estate in 2017. These changes could encourage even more to cash out, and begin doing more investment at home.