How Joe Biden’s housing policy threatens real-estate investing

  • President-elect Joe Biden’s proposals loom ahead of his January inauguration, and real-estate investors are likely to be affected by his plans.
  • Biden’s housing plan suggests big changes lie ahead for the real-estate industry, including with regard to foreign investment and affordable housing.
  • One major point that concerns real-estate investors is the suggestion of a repeal of the 1031 transfer, a strategy they often use to defer capital-gains tax.
  • Visit Business Insider’s homepage for more stories.

Joe Biden has been elected the 46th president of the United States. And as he approaches taking office on January 20, his policy proposals suggest some big changes, especially for the real-estate industry, per his housing plan.

Ultrawealthy real-estate investors, middle-class homeowners, and renters in underserved communities, for a start, stand to have their experience with real estate changed by a Biden administration.

Real-estate investors, in particular, aren’t receiving the proposed changes well.

The Biden transition team did not immediately respond to a request for comment from Business Insider.

Here’s what hangs in the balance.

The 1031 transfer in jeopardy

Throughout Biden’s campaign, many Republicans criticized the president-elect’s stated intention to raise income taxes on individuals making over $400,000 a year.

For real-estate investors, though, the biggest threat was Biden’s proposed repeal of existing tax breaks — specifically, 1031 exchanges.

The 1031 exchange, also called a 1031 transfer, is a provision that gives investors and owners the ability to defer capital-gains taxes from the sale of an investment or business-use property — as long as a “like-kind asset” is purchased with the sale’s profits. In other words, the 1031 allows people to continue buying and selling real estate without paying the IRS a big chunk of change for those transactions.

It’s a go-to strategy for investors looking to swap one asset for another, or for any investors interested in avoiding a capital-gains tax of up to 20%, depending on your bracket. In concrete terms, 1031 transfers could mean hundreds of thousands of dollars in immediate tax savings.

But Biden has proposed ending it for those who take in a yearly income of more than $400,000. It has long been favored by real-estate investors, including President Donald Trump.

The idea to ditch this section of the tax code was contained within the release of Biden’s economic plan. The Real Deal reported that the billions generated by repealing the benefit would support Biden’s “caring economy plan,” which calls for universal preschool for 3- and 4-year-olds and a childcare tax credit of up to $8,000 for middle-class families, among other things.

Both Democrats and Republicans have targeted this tax break over the years, and repeal of the 1031 could mean the loss of more than $50 billion for real-estate investors over five years, according to Congress’ Joint Committee on Taxation. The repeal would require congressional approval, which hangs in the balance with the early January runoff in Georgia set to decide control of the Senate.

Possible backlash to a 1031 repeal

One prominent investor told Business Insider that repealing the 1031 would be a huge mistake. “This is how people build generational wealth without getting taxed to death,” said Cody Sperber, a real-estate investor who lives in Phoenix and has worked his way to hundreds of millions of dollars in deals.

Sperber emphasized that repealing the 1031 could damage several tiers of investors.

He said the 1031 gave investors the ability to build real wealth over time, generate buying power, and roll it forward, growing their investment over the years while getting taxed only one time. It often helps veterans, women, people of color, and those who don’t have access to good banking and financial structures, he said, emphasizing that it helped people like him, who started with nothing.

Competence fighting the pandemic could boost foreign investment

America’s economy has been crippled by the coronavirus pandemic off and on throughout 2020, and many real-estate professionals believe that Biden’s stated commitment to ramping up the fight against the coronavirus would indirectly boost the housing market.

Take the current limitations on international travel thanks to COVID-19. The luxury real-estate sector — which in certain cities like New York relies heavily on foreign buyers looking for pied-à-terres and places to park wealth earned abroad — is suffering as a result.

“This is tarnishing the image of the US as a safe haven,” Bruce Goldstein, a developer and CEO of Bulk Condo Deals, told Business Insider. “We are currently talking with developers in Miami and NYC who have seen the buyers dry up and need to sell the remainder of their condo inventory in bulk to raise capital.”

If the new administration can manage the pandemic better and have a more positive rhetoric toward foreigners, Goldstein said, that could provide stability and predictability in luxury real estate.

Affordable housing

Finally, a significant portion of the Biden campaign’s housing plan is dedicated to the expansion of affordable, accessible housing.

Biden has called for a tax break designed to encourage Americans with modest means or middle-class roots to purchase a home. To that end, he has proposed a tax credit for first-time homebuyers of up to $15,000, which would be subject to congressional approval.

“The $15,000 tax credit for first-time homebuyers is necessary, since there are many young people ready to invest,” said Cecilia Serrano, a broker at Warburg Realty in New York City. “It is a way to energize the economy.”

With a $15,000 tax credit incentivizing first-time homebuyers, The Fool reported that Biden’s plan could heighten demand for starter homes and give real-estate investors from home flippers to developers a new opportunity to profit. If homebuyer demand did in fact increase, the surge could be poised to affect landlords and existing homeowners as well — and lead to a downturn in demand within the rental market.

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