Will Proposed Federal Income Tax Reform Tank My Cash Flow?

[Tobias Falzone]

Ok, so I just had a literal tax nightmare last night, awaking from a deep sleep in a cold sweat. Here is what has been keeping me up at night lately. There are a few proposals for income tax reform that I have been thinking would seem to really affect RE investors. 1) Elimination of State & Local Tax Deduction - property taxes. 2) Elimination of Interest Deduction for Loans. and 3) Effectively eliminating the Mortgage Interest Deduction for most homeowners by increasing the standard deduction. It would seem to me that this 1-2-3 punch of changes would significantly affect how I would have to do calculations for buy and hold properties, forcing me to estimate taxes in a new way really tanking cash flow. Here is a quick back of the envelope calculation illustrating how a cash flowing 8% CAP property could turn into negative cash flow with these additional taxes.

Price	$500,000.00	$500,000.00
25% Down	$125,000.00	$125,000.00
75% LTV	$375,000.00	$375,000.00
8% NOI	$40,000.00	$40,000.00
5.5% 20yr am Loan Payments	$30,955.00	$30,955.00
Cash Flow	$9,045.00	$9,045.00
Year 1 Interest	$20,360.00	$20,360.00
1.2% Property Tax	$6,000.00	$6,000.00
Additional Taxes (35% Bracket)	$0.00	$9,226.00
After New Tax Cash Flow	$9,045.00	-$181.00

I fear if these numbers are accurate, it could trigger a shift in GRMs and Cap Rates across the RE investment spectrum driving down asset prices, particularly for buy and hold investors.  At the same time, reducing or eliminating the mortgage interest deduction along with rising interest rates could serve to dampen traditional real estate purchases as well.  So, my question to you all is are these fears justified, and how would your investment strategy be affected by these proposed changes?