(Editor’s note: This story originally published Jan. 18 in the magazine edition of Real Estate NJ.)
By Michael G. McGuinness
The Gregorian calendar year ended on Sunday, Dec. 31, 2017. That means the end of the lunar year is also coming up. In 2018, the lunar or Chinese New Year will be celebrated Feb. 16. On that date, lunar calendar followers will bid farewell to the Year of the Rooster and welcome the Year of the Dog. Ranking as the 11th animal in the Chinese zodiac, the dog is the symbol of loyalty and honesty. People born in the Year of the Dog are said to possess the best traits of human nature. They are honest, friendly, faithful, loyal, smart, straightforward and venerable and have a strong sense of responsibility. President Donald Trump and former presidents George W. Bush and Bill Clinton were all born in the Year of the Dog in 1946. Not sure what to make of this?
The Trump administration is riding high on its historic tax plan win, and it’s hoping to harness that energy in pursuing an ambitious legislative agenda in the New Year. With 2018 comes the midterm elections, and Republican senators and representatives are hoping to get a few more legislative wins under their belts before their voters head to the polls in November. Admittedly, “this (tax reform) legislation represents an important victory for NAIOP members and the commercial real estate industry. The first major tax reform in more than three decades, the Act recognizes the important contribution that commercial real estate is making to the economy by supporting pro-growth initiatives and acknowledging the long-term nature of commercial real estate investment,” said Thomas J. Bisacquino, NAIOP president and CEO.
Bisacquino notes that this reform will:
- Preserve Section 1031 like-kind exchanges for real estate
- Continue taxing real estate carried interests held for three years as capital gains
- Preserve the deductibility of business interest expense for real estate trades or businesses
- Reduce the tax rate for many pass-through businesses, including many in real estate
- Lower the tax rate for corporations to 21 percent
- Double the estate tax exemption
- Retain in part the historic preservation and rehabilitation tax credit, the New Markets Tax Credit and the tax exemption for private activity bonds (PABs)
“A landlord can only do as well as his or her tenants,” Bisacquino adds. “Our expectation is that this tax reform legislation will result in long-term economic growth and job creation for our nation.”
Other aspects of the federal tax reform are not so good for New Jersey residential property owners since the measure guts the deduction for state income and local property taxes and reduces the amount of mortgage interest that can be deducted. In the last week of December, Gov. Chris Christie issued an executive order to help soften this blow, by allowing New Jersey residents to prepay their 2018 property taxes before the new federal tax law took effect Jan. 1. Prepaying will allow New Jersey taxpayers to claim the payments on their 2017 federal tax returns. In his first formal action in 2018, our new governor, Phil Murphy, could take similar action and work with lawmakers in Trenton to help New Jersey taxpayers by signing legislation that would allow homeowners and renters to fully deduct their property taxes, eliminating the existing $10,000 limit on the state property tax deduction.
For 2018, President Trump has indicated that one of his top two priorities is a $1 trillion infrastructure bill to revamp America’s crumbling roads, bridges, airports and railroads. Republicans have indicated, however, that the bill will largely focus on streamlining bureaucracy and ending agency review processes instead of physical building. The bill will also focus on public-private partnerships and on halting regulations that make it difficult for companies to build. This may not bode well for us here in New Jersey, where we rely heavily on access into and out of New York City. In particular, the proposed Gateway project that would expand ridership capacity to and from the city may be in jeopardy.
Nowhere was this more apparent than in a Dec. 29 letter from K. Jane Williams, the deputy administrator of the Federal Transit Administration, to New York and New Jersey officials. She wrote that a recent funding proposal by the states for the first phase of the project, estimated at $11 billion, seeks a 50 percent federal investment that is “considerably higher than much existing precedent for past ‘mega projects’ ” and would deplete the existing grant program. The letter also criticized the states’ reliance on a 50-50 funding agreement with the federal government dating back to the Obama administration. “We consider it unhelpful to reference a nonexistent ‘agreement’ rather than directly address the responsibility for funding a local project where 9 out of 10 passengers are local transit riders,” Williams wrote. A plan to pay for an estimated $13 billion rail tunnel under the Hudson River raises serious concerns, including that it relies on a “nonexistent” agreement that would have the federal government foot half the bill.
Not feeling very cheery? I don’t blame you. We are undergoing an acute period of change. New Jersey was one of only two states (Virginia was the other) that elected a governor last year. For those of us with deep roots in this state, we’ll probably tough it out. For the investors that are looking for a return on their money, it’s still a crap shoot as to whether they will commit to a high tax state like New Jersey. With so much uncertainty and anxiety about what’s coming next from both the president and new governor, it would be comforting to know that we will continue to be able to rely on the successful New Jersey programs that have borne fruit over the last four to eight years. From my perspective, that includes cleanups of contaminated sites, finely honed incentives that generate new and decent paying jobs and property tax caps that keep more hard-earned income in the pockets of the property owners.
Michael McGuinness is CEO of NAIOP New Jersey and has guided the commercial real estate development association’s progress since he joined the staff in 1997. In addition to overseeing daily operations, programs and staff, McGuinness directs the chapter’s legislative activities and manages the Developers Political Action Committee (DPAC).