Real Estate

Rani Molla is a Bloomberg Gadfly columnist using data visualizations to cover corporations and markets. She previously worked for the Wall Street Journal.

Electing a real estate mogul as president is great news for U.S. real estate, right?

Maybe yes. Maybe no.

Donald Trump has said he would increase the tax rate on "carried interest," the income that currently flows as lower-taxed capital gains to private equity partners and some other investment fund managers -- such as those who oversee real estate funds. A more onerous tax rate on property fund managers could dampen deal flow for that sector of the market.

But Trump has also offered a conflicting proposal for a new tax rate for business partnerships -- which potentially could also include property fund managers -- that would decrease their rates from 23.8 percent to 15 percent. (The standard income tax rate everyone else pays tops out at about 40 percent).

Here are fund managers most likely to be affected the greatest by either change, based on their large North American real estate holdings: 

Land Ho
Fund managers with the most North American real estate assets under management
Source: Institutional Real Estate, Inc. and Property Funds Research
Note: Data as of December 31, 2015.

Like-kind exchanges, a process that allows commercial real estate owners to defer taxes from property-sale profits as long as they reinvest them in other properties, will likely continue under Trump. 

Though Trump has no official policy on these exchanges, he has been in favor of them in the past and may have used them himself. Like-kind exchanges could theoretically be used repeatedly to indefinitely stave off taxes on real estate gains. Each year hundreds of thousands of property purchases use this benefit, according to the Internal Revenue Service: 

This for That
In a "like-kind exchange," commercial property owners can defer taxes on the gains from one real estate sale by reinvesting those gains in other real estate
Source: Internal Revenue Service
Note: 2013 is the latest available data.

While some of Trump’s policies might be friendly to commercial real estate owners, his harsh rhetoric about foreign trade could be bad for real estate overall. Both the International Monetary Fund and the Organisation for Economic Co-operation and Development have recently warned against protectionist policies since they can cause other nations to turn inward and decrease international investment.  

Foreign investment is more important than ever to U.S. commercial real estate (and Trump himself has benefited from foreign investment throughout his own business career). Last year was a record for foreign investment in U.S. commercial properties -- with cross-border spending nearing $100 billion --  according to real estate research firm Real Capital Analytics. That's 18 percent of total U.S. commercial real estate spending, up from a four-year average of 10 percent.

foreign-investment-commercial

 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Rani Molla in New York at rmolla2@bloomberg.net

To contact the editor responsible for this story:
Timothy L. O'Brien at tobrien46@bloomberg.net