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When I began my blog posts about the fiscal cliff and the possible impacts to Boston commercial real estate, I was truly hoping we would not be edging closer to the cliff with each passing week! But here we are. While the political wrangling continues, let’s take a look at the automatic changes to personal income taxes that are scheduled to become effective January 1, 2013.

The fiscal cliff will be unkind to Boston area investors, high wage earners and the affluent:

  • Dividends will be taxed as ordinary income.
  • Dividend tax rates will therefore range 15% up to 39.6%.
  • Capital gains will be taxed at 20% for most investors.
  • Personal exemptions will be phased out for upper incomes.
  • Estates worth more than $1 million will be taxed at 55%.

The fiscal cliff will smite Boston middle-income families with dependent children:

  • The child tax credit will be cut in half, from $1,000 per child to $500
  • Child care tax credits will be reduced
  • Deduction for married couples filing jointly will be reduced

The fiscal cliff will kick all Boston income levels in the wallet:

  • The lowest income tax bracket increases from 10% to 15%
  • The highest tax bracket increases from 35% to 39.6%
  • The middle income brackets go up by 3% to 5%
  • There will be 5 tax brackets instead of 6
  • Payroll tax rates will increase to 6.2%

The possible impact to Boston Metro Commercial Real Estate:

The first impact of higher taxes is reduced disposable income. Low to mid-income consumers may spend less at retail stores and put off larger purchases. This could mean less demand for retail space.

Meanwhile, self-employed tax payers and small business owners will face higher income tax brackets and potentially fewer benefits from itemized deductions. Their ability to expand business operations, take on new employees and tolerate overhead costs will be mitigated. This could also soften demand for commercial space in the Boston area.

Those at the highest income levels may re-allocate assets and revise their economic strategies. Their investment patterns may change, which could cause shifts in our equities markets. Flights to tax-sheltered investment products are likely. Avoidance of the 55% estate tax will be a priority. As this group “circles the wagons” they will have less risk tolerance; they may choose to delay business actions that could otherwise benefit our economy.

All said, personal income tax changes could have some affect on Boston Metro commercial real estate. We could see fewer business start-ups due to the new tax climate. We could also see fewer “trade-ups” to larger facilities due to fewer expansions. As consumers and investors pull back financially, business growth will slow, and demand for office and retail space will soften.

Yet this is small potatoes to commercial real estate in the Boston area.

It is the massive spending cuts scheduled by the Federal government that create the real drop in the fiscal cliff. Already, in the D.C. area, military-related layoffs are taking place. In another example, consider Broward County, FL. They have one of the highest foreclosure rates in the nation – mostly due to the end of NASA programs and thousands of NASA job losses.

Please keep in mind that the above scenarios are offered only as points of discussion; we may yet avoid the fiscal cliff. In the meantime, there are endless variables in business that we cannot control and this is just one of them. If you wait for perfect market conditions, you will never be in the market! It’s wise to evaluate the possibilities, and then create your best strategic plans.

If you are making plans to relocate, begin, or expand your business, I can help you! Let me prepare a cost analysis for the square footage, location and building type you are looking for. As your experienced commercial real estate agent in Boston’s Metro area, I will provide you with excellent options for property leases and purchases.

Contact me today and I’ll find the ideal location to suit your business needs!

Jay Nuss
Jay Nuss Realty Group, LLC
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