Gambling in the property market
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Bloomberg today reports that uncertainty over tax rates has caused some turmoil in the commercial property market. Because property owners are unsure whether or not Washington lawmakers will allow taxes to rise at the beginning of next year, many are hurriedly selling their properties now to avoid a larger tax penalty next year. Here is an excerpt:
Selling income-producing real estate ahead of the possible tax change triggers the question of how to invest the proceeds in an environment where investors are scouring for yield, said Alan Dlugash, a tax partner at New York-based accounting firm Marks Paneth & Shron LLP.
“It’s not going to be easy for them to invest the money and get the same rate of return,” Dlugash said.
Still, clients are coming to Eric Anton’s office seeking advice on whether uncertainty over tax policy is a good enough reason to sell, said Anton, executive managing director for Eastern Consolidated, a New York investment sales brokerage.
“We’re definitely having a lot of those conversations, mostly with long-term New York-based owners,” Anton said. The longer a property had been held, the larger the profit built in, and the more likely the owner is motivated to sell on capital- gains concerns, he said.
“Three years ago it wasn’t a topic, whereas now it’s one of the key decision-making factors,” Anton said. “The real concern is that the lame-duck Congress comes back and makes massive tax increases, because they can.”
Tax rates will rise for everyone if no action is taken, Prante of the Tax Foundation said. The more likely scenarios are that Congress temporarily extends the tax cuts to all Americans for one or two years, or temporarily continues the cuts for all but a small subset of high-income individuals, such as those who earn $1 million or more, he said. Personal residences by and large aren’t subject to capital gains taxes.
For [Michael Haas, chief executive officer of property holding company Direct Invest USA Holdings LLC,], not selling his buildings this year means he’ll be a reluctant buyer next year.
“The larger transactions are the ones that have large profits and allow people to do larger reinvestments,” Haas said. “If you stop that, you’re going to have more people sitting around waiting.”
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