Multifamily real estate is becoming a more attractive investment as a result of the recent tax changes that impact home ownership. Taxes remain as complicated as ever, as does the 1031 exchange, which is now limited to real estate investments.


What the New Tax Laws for 2018 Mean for Multifamily Real Estate Investors

Mar 13, 2018

As is always the case with tax reform of massive scope, the full repercussions of the Tax Cuts and Jobs Act passed in December 2017 will not be felt for some time. However, the changes should be favorable to most multifamily real estate investors. Let’s take a look at some of the main features of the new tax laws for 2018 as they apply to multifamily real estate.

How 2018 Tax Laws Impact Multifamily Real Estate

Multifamily real estate is becoming a more attractive investment as a result of the tax changes that impact home ownership. The new tax laws limit the mortgage interest deduction in itemized deductions to loans of $750,000 or less for new purchases. At the same time, the increase of the standard deduction by nearly 100 percent sharply reduces the number of taxpayers who will choose to itemize, including those who might have chosen to use of this deduction for smaller mortgages.

The laws also reduce state and local income tax (SALT) and property tax deductions to $10,000, which may even encourage high-income homeowners in the most affected states to move out of state.[1] Many of the states with high property prices, and thus high mortgages, are states with high SALT and property taxes as well. Therefore, homeowners in those states will face tax increases on two sides at once, offset somewhat by lower marginal tax rates.

Homeowners in California, New Jersey, New York, and Connecticut could be hit hardest by this double whammy. While California’s population is growing, population growth is flat in New York and Connecticut. A major outflow of high net worth individuals from the Empire State and its southeastern neighbor would have a negative effect on the states’ tax bases. Low tax states that are currently experiencing an increase of residents would be recipients of this population movement. Those states include Texas, Arizona, and Washington, where CWS has investments.

Even if the new deduction limitations do not drive residents to other states, they will encourage renting by making home buying less attractive. Renters are not directly affected by these limitations on reductions because they do not have mortgages or pay property taxes on their residences.

Landlords benefited from the provision in the new laws that allows pass-through companies to take a 20 percent deduction on their pass-through net income. Landlords who had previously paid regular income tax of up to 39.6 percent on income from their multifamily housing can now form an LLC and receive a 20-percent reduction of that portion of their tax bill (and it’s coupled with a reduction of the top income tax rate to 37 percent under the new law). This may revive the multifamily development market to some extent by creating a larger demand for investment properties.[2]

The 1031 Exchange Is Now Limited to Real Estate Investments

The 1031 real estate exchange, which allows investors to exchange investment properties without paying capital gains taxes, got a big boost from the elimination of all other forms of investment from the 1031 exchange. Now, art collectors, for example, will have to invest in real estate if they want to continue to invest tax-free using the 1031 exchange. Motivation to use the 1031 exchange will be even stronger thanks to the doubling of the estate tax deduction to $11.2 million per person and $22.4 million for a couple. This means that twice as much real estate that is “stepped up” from a 1031 exchange upon the owner’s death will go untaxed.

Another result of the Tax Cuts and Jobs Act that’s being hailed by investors is that the act leaves capital gains tax practically untouched. Investors who decide to take their properties out of 1031 exchanges will face no more taxes than they did before the reform.

Taxes remain as complicated as ever, as does the 1031 exchange. Professional advice is therefore especially important as the implications of the new tax reality are sorted out.

At CWS Capital Partners, we are a fully integrated multifamily real estate investment management firm that offers everything from due diligence and risk management to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitionsrepositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country and employ a team of experts who can help you hone your investment strategy.

For more articles like this one, check out our investment strategy blog posts.

Contact us today to get started on your next investment.


The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.

All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.

Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.

Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRA, SIPC.

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