President Biden called on Congress to make tax code changes this week that could hurt commercial real estate investors’ pockets. But the code changes detailed in The American Families Plan could also result in fundamental shifts in how real estate is bought, sold and developed.
One of the major themes of the president’s campaign as well as his first 100 days in office has been equity. Instead of raising taxes on middle-class Americans to pay for the plan’s $1.8 trillion in spending, he is setting his sights on high-earning investors and real estate investors, in particular.
In the real estate industry, he is taking aim at two tax incentives that are baked into a tremendous number of real estate deals: 1031 exchanges and carried interest for private equity fund managers.
“The administration is looking for ways to limit disparity and the wealth gaps we have in this country—the sort of K-shaped economy that we are emerging into more and more that existed before the pandemic but has been exacerbated by it,” said Bradley Tisdahl, CEO of Tenant Risk Assessment. “But it would dampen a lot of the upside for folks of inheriting wealth and making money through investment as opposed to through work.”
1031 exchanges are used in all property types and across the real estate investor universe. Biden is asking Congress to enact legislation that would disallow 1031 exchanges for gains greater than $500,000.
“A lot of 1031s are over the limit of $500,000,” said Jonathan Hipp, principal & head of Avison Young’s U.S. net lease group, “and on the private capital side, they are all going to be above that $500,000 capital gains.”
Meanwhile, Biden has proposed raising the long-term capital gains tax rate from 20 percent to 39.6 percent for investors with incomes over $1 million.
“It’s a very upsetting proposal for the real estate industry,” said Robert Gilman, co-leader of the Real Estate Group at Anchin. “I think everyone was under the thought (that) tax rates were going up—both capital gains and ordinary rates—but this is a double hit against the industry.”