Some apartment owners are getting some extra prodding to sell from the tax man. With the potential end of the Bush era tax cuts at the end of the year, capital gains taxes for commercial real estate are set to increase from 15% to 25%.
The influence isn't huge, given the number of methods sophisticated investors have to avoid the tax, but it does appear to be stoking the fire for the always active fourth quarter.
“This is impacting the decision to sell right now,” says Darron Kattan of Franklin Street Real Estate Services. “I know of at least one owner that's willing to take a lower price now to avoid the added taxes.”
Nicholas Meoli, a multifamily specialist in Marcus & Millichap's Tampa office, expects to have “a couple more” deals come to market this year driven by the threat of higher capital gains taxes.
“If you were looking to sell in the next couple months, now is the time to put it on the market,” Meoli, says. “You could save yourself 10%.”
If capital gains taxes do increase next year, multifamily brokers expect the number of 1031 tax-deferred exchanges to grow to considerably.
However, the tax worries are also a backhanded compliment to the multifamily market. Values and equity are up, particularly over the last six to eight months. With financing for multifamily deals at all-time lows —around 4% for a 10-year term — and growing occupancies and rental rates, class A and B apartment properties are tempting investors.
“If you can get a 15 to 20% cash on cash return [ratio of cash flow based on cash invested] it makes a lot of sense,” Meoli says. “Prices have really skyrocketed the last six to 12 months.”