Tax Reform Fuels Development Renaissance On Long Island
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Almost a year into the Tax Cuts and Jobs Act, the real estate industry continues to benefit from several new tax policies. Among those changes, the reduction of the corporate tax rate, the doubling of individual and joint tax deductions and the creation of opportunity zones has incentivized real estate investors to acquire and develop new properties.
On Long Island, asset classes from multifamily development to industrial and manufacturing spaces could benefit from increased investor interest, fueling an increase in development among communities.
“New bonus depreciation, the lowering of the corporate tax rate, those are going to be great for investors who want to put money into Long Island across all asset classes,” Berdon LLP Certified Public Accountant Nicole Barthelemy said.
Changes to the tax policy have not been without concern. One of the biggest changes in tax policy has been the cap on mortgage interest rate tax deductions to $10K, Barthelemy said. For prospective homeowners, tax deductions help make homeownership more feasible and financially beneficial.
Nassau and Suffolk counties, respectively, have homeownership rates of 80.5% and 79%, Data USA reported. In 2015, Nassau County taxpayers claimed an average $23,856 in deductions while Suffolk County residents claimed an average of $18,413, Newsday reported. While some real estate experts thought that the cap on deductions would push more Long Island residents toward renting, additional tax benefits, like the doubling of individual standard deductions from $6K to $12K and from $12K to $24K for joint filers, have kept demand strong.
“There was a lowering of the itemized deductions allowed, but on the flip side, the standard deduction for individuals doubled,” Barthelemy said. “A lot of these changes, along with the fact that interest rates are still low, shouldn’t deter people from wanting to own their homes like we initially thought it would.”
Multifamily development also continues to boom on Long Island, particularly for affordable housing. A growing strategy has been investment into opportunity zones. Under the TCJA, opportunity zones are low-income, underdeveloped areas that the government has identified for improvement by offering investors tax incentives. Investing in an opportunity zone, for instance, allows investors to defer capital gains tax. The hope is that the increased tax benefits will encourage investors to put capital into developments like affordable housing, Barthelemy said.
While Long Island has fewer opportunity zones than other areas of the country, towns like Riverhead were recently recommended by the state of New York for designation as an opportunity zone. Under the program, Riverhead’s downtown area could see a revitalization of local business. A more recent initiative, the rules surrounding opportunity zones still require further clarification from the federal government.
“Hopefully, as we shed more light on where these zones are, that will spur development, more on the residential side,” Barthelemy said.
There is also continued interest in transit-oriented, affordable multifamily development. With 8,300 underutilized acres of land near transit stations, Long Island developers have room to build. Additional bonus depreciation under the TCJA has also made it beneficial for real estate owners to renovate and improve properties. For qualified property put into use between Sept. 28, 2017, and Dec. 31, 2022, first-year bonus depreciation percentage increased from 50% to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.
Qualified property under the new law is any tangible personal property, like real estate, with a recovery period of 20 years or fewer. Investors in value-add multifamily assets, for instance, could benefit from increased bonus depreciation.
“It’s a great incentive for investors to put money into infrastructure and affordable housing, and I think that is going to continue to incentivize new development in these areas,” Barthelemy said.
Beyond multifamily, Long Island investors have turned their attention toward industrial assets. The lowering of the corporate tax rate from 35% to 21% was designed to encourage companies to keep manufacturing spaces and jobs within the U.S., which in turn, prompts an increased search for warehouse space.
“Investors are going to want to put more money into those properties in particular because of the reduction of the corporate tax rate,” Barthelemy said. “The trade tariffs on new imports could also benefit Long Island real estate, where companies could start looking to manufacture more products domestically.”
Industrial activity on Long Island continues to pick up speed. A quarter of the jobs created in New York State in 2016 by companies receiving breaks from industrial development agencies, over 51,000, were created on Long Island, according to Newsday. The TCJA could help fuel this growth as more businesses flock to Long Island to invest in warehouse and manufacturing space.
Combined with increased interest in multifamily and other commercial real estate investment, tax reform has helped drive a development renaissance across Suffolk and Nassau counties.
This feature was produced in collaboration between Bisnow Branded Content and Berdon LLP. Bisnow news staff was not involved in the production of this content.