As Joe Biden Takes Office, the Real Estate Market Watches
Jonny Weiss Explains How the Agenda of the Newly-Elected President, Now Supported by a Democratic Senate, Might Affect the Real Estate Industry in the Near Future
With only a few days left before the transfer of executive power from the Trump administration to the Biden administration, the fates of many current tax laws and government policies regarding real estate are far from certain. It was thought after Biden’s victory in November that the best possible outcome for the real estate industry would be a divided government—Democrats in control of the Presidency and the House of Representatives, with Republicans holding the Senate. However, the recent Senate run-off elections in Georgia yielded an unexpected result, with both races breaking for the Democratic challengers, thereby handing the upper chamber of the legislative branch to the Democrats as well and re-engineering the equation of power in Washington. Whereas before the run-offs implementing some of the more contentious elements of the Biden agenda seemed thoroughly implausible, such an outcome is now within the realm of possibility—and the real estate market is watching certain developments particularly closely. Real estate professional Jonny Weiss provides a short rundown of some of the industry’s interests that may be addressed by the new administration.
A much-utilized tax benefit that has been the law of the land for more than a century, 1031 exchanges are mechanisms enabling the deferral of capital-gains liabilities after selling off property so long as the seller channels those funds into acquiring new property within a short amount of time. In theory, if a real estate investor keeps rolling the proceeds from sales into new investments, these taxes can be deferred for an infinite amount of time. President-elect Joe Biden has announced he favors discontinuing 1031 exchanges for those with incomes exceeding $400,000. Should this initiative pass into law, experts speculate that it would, at best, discourage a substantial amount of real estate development, and, at worst, depress it outright. This is due to the fact that a vast portion of the real estate in the United States is developed by those with an income above the prescribed cutoff point.
According to Weiss, the creation of so-called ‘opportunity zones’ throughout the country was an element of the broad-sweeping Republican tax legislation of 2017. The theory goes like this: states would select 8,700 low-income, at-risk neighborhoods as opportunity zones certified by the Department of the Treasury. Investors would then be allowed to direct income from capital gains into qualified funds that would be used to make much-needed improvements in these zones. Taxes on most or all of the capital gains used for investment—which investors would otherwise be obliged to pay the government—would be deferred. But when states finally did select areas to designate as opportunity zones, many included well-off suburban neighborhoods. Critics of the program have claimed that it does little to benefit economically depressed areas, and instead acts as a tax shield for unscrupulous developers. Joe Biden has resolved to reform opportunity zones, pledging to rewrite legislation to include more transparency, oversight, and accountability, and disallowing wealthy neighborhoods from qualification.
According to Weiss, one of the major ways the COVID-19 pandemic has affected the real estate industry is in rent collection. Simply put, due to measures put in place to stem the spread of the virus, many renters are much worse off financially than they were previous years. In the early months of the pandemic, many became delinquent in paying their rent, opting instead to spend what little money they had saved on food, medicine, and other necessities. Recognizing that, among other things, the situation was becoming untenable for lessors of property, congress passed an initial economic stimulus package in March of 2020 that gave up to $1,200 to millions of ordinary Americans. In turn, many renters who may have otherwise defaulted instead paid up. But as the months went by and the virus did not subside, that money quickly ran out. A second round of stimulus was passed in December of 2020, this time releasing only $600 to most Americans. Needless to say, it did not go as far—especially over the holiday season—and its effects have already largely worn off. President-elect Biden has called for a third round of federal stimulus featuring $2000 checks, but it is a tricky sell to congress, and it is a subject where control of the Senate factors in immensely. Democratic Senator Joe Manchin of West Virginia has declared his opposition to the $2000 checks, citing fiscal irresponsibility as his main concern. As the Senate is split evenly between Democrats and Republicans with Vice President-elect Kamala Harris casting a vote in case of ties, this one Senator’s stance could imperil any such legislation.
According to Jonny Weiss, every new presidential administration brings with it its own unique agenda, and the incoming one is no exception. From the perspective of the real estate industry, should Joe Biden and the newly-flipped Democratic Senate manage to implement everything they wish, the results would be decidedly mixed. On the one hand, the elimination of the 1031 exchanges for those with high-incomes would significantly de-incentivize real estate development in the United States. On the other hand, adding more oversight and regulation to the Trump administration’s opportunity zones would be welcomed, as would a new round of larger stimulus checks. However, Joe Biden’s stated plans are ambitious and anything but a foregone conclusion. Should just a single Democrat in the Senate oppose him on a floor vote, any piece of legislation could easily fizzle. As with all new administrations, the real estate industry will simply have to wait and see what transpires in Washington over the next few months before reacting.
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