Losing the Business Interest Expense Deduction and the 1031 xchg

[Llewelyn A.]

I'm curious to know how we, as Real Estate Investors, think about the proposed Republican Tax Reform that is currently being proposed.

There are two very significant changes which will affect ALL businesses, but ESPECIALLY Real Estate.

The first is the elimination of the "Business Interest Expense Deduction" which I am assuming refers to any business which is bought using Debt. Basically, from what I have been reading, those of us who have bought an Investment Property using a Mortgage will no longer be able to deduct the Interest on that Mortgage as a Business Expense.

The other proposal is the elimination of the 1031 Starker Exchange Rule. From what I understand, they want to stop the deferment of Capital Gains but allow you to fully deduct the purchase of a new Property to offset the Capital Gains.

Both of these proposals seems to be a YUGE effect on all Investment Real Estate.

Another, more towards Primary Residences, is a proposal to increase the Standard Deduction by double the amount. This proposal will obviously make buying your home less desirable since you either take the Standard Deduction or you take an Itemized Deduction, which includes Mortgage Interest on your Primary Home.

All in All............... this is sounding DISASTROUS toward Real Estate in general.

I think for those of us who are in route to financial independence, these are two road blocks which have been put out there for us to navigate through.

In my mind, 3 questions come up.

1) Did I misinterpret the Republican Tax Reform correctly with these two rules? (I sincerely hope so)

2) If I didn't misinterpret it, how likely will this Tax Reform be passed considering that Congress and Trump are Republicans? 

3) If I did not misinterpret it, will previous purchased investments be most likely Grandfathered in?

I am hoping that I have completely misinterpreted it and that others who have been following this proposed Tax Reform will help to alleviate my fears.

I also thought that I would link the Earnest and Young report for research purposes: EY 1031 Tax Reform Analysis

Here is another quote from PWC:

"Interest As part of the move to full expensing for business investment, the plan eliminates the current deduction for net business interest expense associated with debt incurred to finance such investment. Businesses will be allowed to deduct interest expenses only against any interest income. “Any net interest expenses may be carried forward indefinitely and allowed as a deduction against net interest income in future years.” The report states that the Ways and Means Committee “will develop special rules with respect to interest expense for financial services companies, such as banks, insurance, and leasing, that will take into account the role of interest income and interest expense in their business models.”

PWC Tax Reform Analysis

Thanks,

Investor Llew