Understanding new policy proposals and their potential impact on your business can help you make the best decisions about asset protection and estate planning.
The new Biden administration brings with it a wave of political changes that will affect property owners, landlords and investors. Here are the top seven potential changes real estate investors should know about.
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The 1031 exchange
The 1031 exchange is a provision that allows investors to defer their capital gains taxes on selling an investment property and invest the profits in another property. Named for IRS Code Section 1031, this is a popular “hack” for real estate investors.
Exchanges can only be made using similar properties and the rules of the IRS limit the use of this provision on vacation properties. The scheme also comes with time frames that can make it difficult.
The Biden plan to mobilize American talent provides for “taking back unproductive and unequal tax breaks for real estate investors with incomes above $ 400,000”. During the election cycle, the Biden government mentioned that it is seeking “similar exchanges,” which means that these 1031 exchange programs may be abolished.
However, lawmakers on both parties have been taking shots on 1,031 exchanges for some time, and President Trump limited that option to real estate only. It remains to be seen whether the 1031 stock exchanges will be successfully defeated.
The President’s Housing Plan outlined a path for every American to have access to affordable, safe, accessible, energy-efficient housing that is “near good schools” and has a “decent route to work.”
To that end, Biden’s plan would invest $ 640 billion over 10 years with a $ 100 billion housing fund to build and upgrade affordable housing. This plan includes zoning laws that would encourage affordable housing across the country.
Landlords in low-income markets would certainly be affected by creating cheaper alternatives for tenants who need a cheaper rent. But it also creates new opportunities to invest in affordable housing.
Tax credits for first-time home buyers
Biden has proposed a maximum tax credit of $ 15,000 to help young first-time buyers make down payments for their starter homes. This will be greater than the $ 7,500 tax credit under President Bush and the $ 8,000 tax credit under President Obama. (Trump withdrew the loan.)
This loan could help new investors start their real estate portfolios.
The US Department of Housing and Urban Development (HUD) sets the criteria that a “first-time homebuyer” must meet. To qualify, you must:
- Have not had a main residence within three years. This also applies to the spouse of the buyer.
- Have only had a main residence that is not linked to a permanent foundation according to the relevant laws for an indefinite period of time.
- Own only property that violates local, state, or exemplary building codes and the cost of remodeling it to comply is no more than building a permanent structure.
The Ministry of Commerce plans to introduce new energy efficiency standards for buildings for building appliances and equipment. This will inevitably add to the cost of both construction and building maintenance, especially for commercial property, but hopefully lower operating costs and combat climate change.
The goal is to cut emissions by 50% by 2035. The Feds may also introduce tax incentives to cover these additional costs, so keep your fingers crossed.
The federal tax code’s state and local tax (SALT) deduction lowers federal taxes for investors in cities and states with high taxes.
The Tax Cuts and Jobs Act (TCJA) capped the amount that could be claimed as a SALT deduction for tax years between 2018 and 2025. The $ 10,000 deduction limit applies only to taxpayers who are single, married together, or registered as a head of household. The limit is $ 5,000 if you are married and filing separately.
Biden’s government is proposing to increase the SALT deduction alongside taxpayers’ adjusted gross income. The removal of the SALT cap would remove individual home mortgage interest deductions and state and local taxes. The value of the SALT deduction as a percentage of Adjusted Gross Income (AGI) tends to increase with the income of the taxpayer, so the proposed abolition would impact the tax liability of the wealthy, especially in high-tax countries.
The Biden government is expected to provide an additional $ 1.6 trillion to expand industrial infrastructure. This would increase the demand for commercial real estate. The government has also pledged an additional $ 5.4 trillion to expand health coverage over the next decade. This could drive demand for additional medical space and the conversion of some retail space into medical facilities.
Investors whose properties include clinics and medical practices as well as other medical properties such as material storage and flex office space could benefit from this additional expenditure. Investors can also be smart about converting their properties into healthcare areas whenever possible.
The previous deadline for enforcement and eviction moratoriums was January 31; The Centers for Disease Control and Prevention (CDC) approved an extension of the moratorium to 30. Speculation remains about possible further extensions.
With renewals, more landlords and real estate investors will not be able to terminate tenants who are unable to pay their rent. The best way to handle this is for property owners to negotiate new payment plans with their tenants, which can result in happier tenants as well as happier landlords. Some rental payments are better than none, and it is a difficult market to find new tenants.
Lots of small investors and landlords are struggling, but Biden has said he plans to help mom-and-pop landlords once these guidelines go into effect.