The new Republican tax plan could make Manhattan’s luxury condo developers very happy.
On Wednesday, White House leaders and GOP lawmakers proposed lowering the maximum rate businesses, including many LLCs, taxed under the personal income rate pay, to 25 percent from 39.6 percent, among other changes.
Today, many Manhattan condo developers pay the top 39.6-percent rate on apartment-sale profits, while rental developers generally pay the 20-percent capital gains rate (which the tax plan wouldn’t lower). Halving the top income tax rate for LLCs would suddenly make condo development a lot more appealing relative to rental development and could lead to more of the former and less of the latter, said Kenneth Weissenberg of accounting firm EisnerAmper.
The plan still has to pass Congress and is light on details. Lawmakers said they want to install “guardrails” to make sure wealthy business owners don’t benefit from the lower LLC tax rate, but it wasn’t clear what these would look like and whether they would affect condo developers.
“Nobody really knows on this until we see actual draft legislation,” said David Spencer, a tax attorney. “It’s one of those devil-in-the-details points, details like ‘will a promote interest qualify for the lower rate’ could have a very significant impact across the real estate landscape”
But reform of this magnitude could well shake up the real estate industry. “When they make drastic changes to the tax code, behaviors change,” Weissenberg said. Take mortgages. Republican lawmakers want to double the standard deduction, which would make the mortgage interest deduction useless for most taxpayers, making it harder to borrow and buy homes.
“So yes, people may build more condos,” Weissenberg said, “but then fewer people can afford to buy them.”