With the Biden Administration now passing its first 100 days in office, let’s take a minute and assess where the new Administration is headed in terms of policy proposals that will directly impact real estate investors (REIs). Understanding what potential impact these changes might have on your real estate investment business helps you make better business decisions.
Here are six policy proposals on the horizon that REIs should know about.
The 1031 Exchange
This provision in the IRS code allows investors to defer capital gains when selling one investment property and investing the proceeds into another property. The philosophy behind this provision is to encourage REIs to upgrade their real estate portfolio and to only pay taxes on their capital gains one time, essentially when they cash out.
During the campaign, the Biden camp floated the idea of “rolling back unproductive and unequal tax breaks for real estate investors with incomes over $400,000.” They mentioned taking aim at “like-kind exchanges,” meaning these 1031 Exchange programs may be eliminated.
As of right now, there has been no concrete legislative proposal put forward by the Biden Administration on either limiting or eliminating the 1031 Exchange provision. That said, the Administration’s overall policy thrust is focused on raising revenue to pay for large-scale spending programs (i.e., infrastructure).
Lawmakers from both parties have been making noise for a while now about the need to limit or eliminate 1031 Exchanges. Keep a close eye on this issue in the weeks and months ahead. Any changes passed by Congress and signed into law by President Biden would take effect in 2022 or later.
Low Income Housing
While their programs and policies are not yet fully defined, the Biden Administration plans to invest 640 billion dollars over a decade to construct and upgrade affordable housing.
The plan includes controversial changes to local zoning laws, making it more difficult for communities to limit single-family housing areas. Other provisions are designed with the intent of providing more Americans access to housing that is affordable, safe, accessible, energy-efficient, and located “near good schools” with a “reasonable commute to their jobs.”
It is too soon to gauge precisely how this plan will shake out in terms of implemented policy, but there are elements of this policy proposal that could have serious impacts on REIs, such as the proposed zoning changes.
Tax Credits For First Time Home Buyers
Here’s a policy change that would directly benefit new REIs. The Biden Administration wants to institute a $15,000 tax credit for first-time homebuyers.
According to The U.S. Department of Housing and Urban Development (HUD), to qualify as a first time homebuyer, you must (among other criteria):
- Have not owned a principal residence within three years (also applies to the buyer’s spouse).
- Have only one principal residence.
As part of the overall policy concept of a “Green New Deal,” the Biden Administration plans to introduce new performance standards for building appliances and equipment. This will undoubtedly increase construction and maintenance costs but hopefully lower utility costs and combat climate change.
In high-tax cities and states, like New York, the Trump Administration’s limitation on deducting state and local tax payments (SALT) from Federal tax liability impacted a large number of REIs.
The Biden administration is proposing increasing the SALT deduction alongside the adjusted gross income of taxpayers. The SALT cap repeal would remove itemized deductions for home mortgage interest and state and local taxes.
The value of the SALT deduction as a percentage of adjusted gross income (AGI) tends to increase with a taxpayer’s income, so the proposed repeal would impact tax liability for the wealthy, particularly in high-tax states.
As I have previously discussed in this blog, the CDC eviction moratorium has been extended through June 30, 2021. The real question is, what happens after July1? Will Washington step up and compensated landlords for billions in lost rental income?
Significant numbers of noncorporate landlords are struggling. President Biden has indicated that he wants to help small investors and landlords once the moratorium is lifted, but so far that’s a discussion only with no substantive policy proposal.
Will the eviction moratoriums be extended beyond June 30? At this point, it is anyone’s guess. What is certain is that, for the good of both landlords and tenants and therefore the nation as a whole, the Biden Administration needs to implement policy that protects both landlords and tenants and restores a level playing field to the rental market.
At Sterling Property Solutions, we can answer all of your property management questions and address any challenges. Together, let’s form a plan for you to take full advantage of the current conditions and put in place a robust, long-term program for your success.
Please give us a ring at 914-355-3277 or send us an email at firstname.lastname@example.org.