HOW THE NEW FEDERAL TAX CUTS AFFECT REAL ESTATE

There had been a lot of chatter about how the new federal tax-cut package was going to allow home mortgage borrowers to take deductions on their monthly insurance premiums…but the tax rule didn’t make it into the final package. Instead, property investors are getting a 25% deduction in their capital gains tax.

As the financially savvy are well aware, in late May, the newly approved Senate tax bill allows for the long-term capital gains tax rate to fall to 15 percent, down from 20 percent. The new cuts apply to investment transactions made on or after May 6, 2003 -- and, of course -- only to investments owned for one year or more.

We wanted to know how the new tax bill affects real estate investors, so we asked James W. Jordan, CPA, a partner in Gaytan Kallman & Company LLP CPA’s. Gaytan Kallman, a public accounting firm, was established in 1930 encompasses all facets of accounting. Jordan has 30 years of Tax experience on all aspects of taxation including property.
Jodi Summers: What does the new tax bill means to real estate owners and purchasers?

James W. Jordan: The biggest thing as it pertains to real estate is the reduction in the long-term capital gain rate. It’s gone down from 20% to 15%, effective for sales occurring after May 6, 2003.

JS: Why did the government lower the capital gains tax?

JWJ: There’s been a lot of clambering for that for a number of years. People seem to think a high capital gains rate is an impediment to investment. Some people are even talking about eliminating capital gains tax altogether. That’s not politically palatable for a number of people, so they just go for reductions in the rate, and they finally got what amounts to a 25% reduction, going from 20% to 15%.

I believe that the reduction in capital gains is aimed more toward stock market investors than it is for real estate investors.

JS: Why?

JWJ: For a long, long time there have been arguments that the perceived high capital gains rate was an impediment to investment; thus investors were putting their money elsewhere, rather than start up businesses and star up companies. The argument has always been that if you lower or eliminate that rate, then that’s going to attract capital to the start-up business market.

Real estate happens to be a side beneficiary to that reduction to the rate. I don’t believe the bill was aimed at real estate per say.

JS: Will this bill have any impact on real estate in Southern California?

JWJ: My own personal opinion, and I hope that politics are not creeping into it; I don’t think it’s going to have an impact at all. I don’t think that investors are going to respond in the fashion that a lot of politicians believe they will.