Biden tax proposals could cause problems for real estate
The White House is working on a proposal to increase the capital gains tax to 39.6% for individuals who earn more than $ 1 million a year. And during the campaign, he said he wanted to end the 1031 exchange rate cut altogether.
While all of this is currently speculative, if at all, the real estate industry would be of concern.
“Real estate has a long history of good business,” Jessica Millett, partner and chair of the tax department at real estate law firm Duval & Stachenfeld, told GlobeSt.com.
This was continued thanks to the 2017 Tax Cuts and Jobs Act, which limited some tax breaks for businesses and individuals. “For virtually all of the limitations Congress put in the 2017 tax law, there was generally a ‘but real estate gets a better deal’ [caveat]Millett says.
An increase in capital gains for the wealthiest individuals does not mean the end of real estate investment, as other sectors would face the same limits. But that could lead to very different strategies, with less turnover.
“If a property generates cash flow and has positive equity, an investor will likely be hopeful that the rate of capital gains will be reduced in the future,” said Scott A. Johnson, president of the Real Estate Practice Group of Eastman & Smith. GlobeSt.com.
Ending the 1031 postponement would likely reinforce a slowdown, as it “would further encourage an investor to hold real estate investments in the hope that the rate of appreciation will be reduced by a future administration,” Johnson says.
“It drives investment,” Reid Thomas, chief revenue officer and managing director of JTC Americas, formerly NES Financial, told GlobeSt.com. You can sell one asset, take the gain, and put it in another. ”
The biggest losers may not be the biggest players. “The majority of transactions are relatively small residential real estate,” says Thomas.
And those who are highly exposed as qualified intermediaries could find themselves without business.
“It is difficult to make general market forecasts, but it would seem fair to assume that this would create downward pressure on asset values in all sectors, including CRE, with impacts varying depending on the amount. relative sector assets held by taxable investors in the United States, “Baker Botts partner Matt Donnelly told GlobeSt.com.
The triple threat would be a simultaneous end of 1031, an increase in the death base, and a doubling of capital gains. “These are three things in particular so close and dear to the real estate industry, that many people see as part of the fabric of real estate investing,” says Millett.
But Millett adds that investors shouldn’t be too worried. “Every day a new tax law comes out, new guidelines are published,” she said. “While it may sound like the sky is falling, there will be more to come to spur investment if you can find the right lobbyists in Washington, DC.”