January 20, 2021
A transition of power always brings with it some shift in priorities and policies. As the newly elected President Joe Biden looks to make his mark on the U.S., we can expect changes that will impact the economy at large, including CRE investments.
While we don’t have a clear picture of exactly what will be put into place during the new administration’s term, there are some clues we can see early on. A few announcements and initial proposals include provisions that could impact both CRE directly and indirectly.
Broad Tax Changes Expected
Taxation is expected to shift with the new administration, both by repealing some parts of the 2017 Tax Cuts and Jobs Act and by instating new taxation policies. One proposal suggests returning the marginal tax rate to pre-2017 rates, restoring the Pease limitation, and removal of 199A tax deductions, which allowed some taxpayers to deduct up to 20% of their qualified business income.
Higher income tax rates for those earning above $400,000 have also been proposed.
Other large changes to the tax code are unlikely in the early years of the administration and may require more planning and bipartisan agreement before being implemented, despite the incoming party having a majority in both the Congress and the Senate.
In a more positive step for investors, there is also talk of increasing depreciation periods for multifamily buildings from 27.5 years to 30 years.
Pandemic Relief & Stimulus
Although a stopgap budget bill passed with some pandemic relief funding in late 2020, the new administration is expected to expand on that. A new pandemic relief bill is expected early in 2021.
Initial proposals for the new package would include rental support, mortgage support, utility support, extensions of eviction moratoriums, and additional stimulus checks to individuals.
One of the stated priorities in the proposed tax policies is an adjustment to how 1031 exchanges will be done. The existing proposal is to the remove 1031 exchanges for high earners with an annual income above $400,000. This change would force high earners to pay capital gains taxes on real estate investment property sales, including like-kind exchanges, reducing the amount of capital available for reinvestment.
Affordable Housing & Rent Tax Credits
Expansion of affordable housing is a high priority for the Biden administration. This could manifest in a few separate policy changes.
First, there may be an increase in the funding provided to affordable housing development programs. This may be paired with an expansion of existing section 8 tax credits.
Another big change around affordable housing could be a new rental tax credit to give tax breaks to renters under a certain income level. This could make a significant impact on affordability for multi-family units, opening up the market to a larger pool of tenants.
Lastly, there may be changes to the definition of and due diligence involved with opportunity zones. Stricter definitions of what qualifies as an opportunity zones would put some limitations on access to prime investments. Higher standards could also be put on due diligence, including public disclosure of the anticipated impacts of developing a specific opportunity zone.
The Biden administration has emphasized a need to fund infrastructure projects across the country. It’s likely that funding will be put towards public transit projects in urban areas as well as revitalizing crumbling infrastructure in rural and urban areas like.
Oversight & Enforcement
New leadership will be installed in the Treasury, FTC, HUD, SEC, and the FDIC. With these changes, each organization may see a shift in priorities, enforcement, and policy.
Greater oversight of financial and lending institutions is expected.
Ongoing Policy Reform
Despite many leadership changes, some positions will remain filled until expiry, including the director of the FHFA, Mark Calabria. Calabria is spearheading the initiative to privatize Freddie Mac and Fannie Mae, which will presumably continue on schedule. Calabria is also in charge of the annual multifamily lending caps.
Until the new administration puts forth complete documentation to begin creating new bills, or until executive orders are officially signed and published, it’s difficult to say with certainty what will change. In the meanwhile, be sure to stay in touch with your trusted commercial real estate professional, who can help guide you on investments, leases, renewals and other matters.
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