Could taxing times be ahead for real estate …

President Trump has put his tax plan on the table for the world to see.  The big question is … what does it REALLY mean?

But rather than speculate on the future possibilities, let’s take a look at the last time big-time tax reform went from rhetoric to reality.

Way back in 1986, then-President Ronald Reagan signed a tax reform act that was hailed as one of the most significant pieces of legislation ever passed … and cleverly titled … The Tax Reform Act of 1986. 

Now we’re not saying Trump’s tax plan is anything like Reagan’s.  And who knows if Trump’s plan will pass, or what it will look like in its final form.

But they’re both considered “sweeping” in terms of radically changing the tax system.  

And when you consider how much time and effort businesses and investors put into navigating the incredibly confusing and cryptic U.S. tax code, it’s a safe bet ANY substantial changes will result in equally substantial changes in the strategy and behavior of market participants. 

Does that sound boring and wonky?

It is.  BUT … it’s probably worth the effort because of something called the Law of Unintended Consequences.

In this example, prior to 1986, lots of high income earners were buying up real estate for the LOSSES.

Seems weird.  But as Robert Kiyosaki pounded into our heads on the Summit at Sea™, wealthy people have different problems than those still working to become wealthy.

Wealthy people have TAX problems.  And prior to 1986, real estate offered an attractive tax shelter which many high earners invested in.

But The Tax Reform Act of 1986 removed this valuable benefit, and in perhaps what should have been obvious fashion, those wealthy investors started to DUMP those no longer useful investments.

Of course, when you have a glut of sellers, the result is falling prices. 

Those who were proactive and got out EARLY fared far better than those who waited.  As we like to say, “Plan and Do is better than Wait and See.

But there’s more to the story …

Because real estate is such a GREAT asset, lenders LOVE to loan against it.  It’s true today, and it was true back then.

Now even if you’re younger, you know what a bank and a credit union are.  But you may never have heard of a Savings and Loan.

An S&L felt just like a bank. 

You could use S&Ls to hold deposits, get loans, and they were backed up by the Federal Savings and Loan Insurance Corporation (FSLIC).  The FSLIC was to S&Ls what the FDIC is to banks today.

Prior to 1990, S&Ls were among the most popular places to get loans for real estate. 

But something happened which drove the FSLIC into insolvency (yes, that can happen) and sent S&Ls the way of the dodo bird.  Extinct. 

It was The Tax Reform Act of 1986.  And we’re pretty sure that’s NOT what Ronald Reagan had in mind when he signed it.

That’s the way unintended consequences work.

We won’t bore you with all the details because that’s not the point of our comments.

The short of it is the S&Ls borrowed short to lend long against assets they thought had good price stability and liquidity. 

But the demand was largely driven by tax benefits and not by true underlying value. 

And when the tax code changed radically, so did the value-supporting demand of wealthy people seeking tax shelters.  No tax shelter, no demand.

In other words, the investments didn’t make sense without the tax benefits.

So with a new tax plan on the table, it might be a really good time to take a deeper look at your portfolio. 

How dependent are you on the current tax benefits to make the investment make sense?

If the tax benefit goes away, could you (and would you want to) stay in the deal?  If not, is there a way to restructure it so you could?

How vulnerable are you to interest rate changes?  Right now, stable financing structures might make better sense because of an unstable economic climate.

We’re not saying Trump’s tax plan is good or bad.  We’re not that smart. 

We only know it’s radical.  And the last time radical tax reform actually happened, it had unintended consequences … which created both problems and opportunities, depending on how one was positioned and paying attention as events unfolded.

Personally, we think it’s exciting.  Lots of change.  Lots of uncertainty.  Lots of opportunity to move boldly while others are hesitating.

It’s why we study, why we network with smart people, why we watch the macro and micro events so carefully.

There’s ALWAYS opportunity because there’s always danger.  They go together … and it’s your skill in navigating the changes that dictates which side YOU end up on.

Until next time … good investing!


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