In July, we wrote about how President Biden’s Green Book had proposed limitations on IRS Section 1031 Exchanges. That focus may have changed recently. It is anyone’s guess which policies from President Biden’s new tax plan will survive Congress, but on September 13, the House introduced potential tax reforms in a continuing effort to find ways to fund the $1.8 trillion American Families Plan. Some of those proposals could have an immense impact on the real estate industry.
In order to gauge that impact, it is important to remember the benefits that were afforded the real estate industry through the Tax Cuts and Jobs Act of 2017 (TCJA). The goal of the TCJA was to spur economic development in the real estate sector, and it sought to do so with benefits such as income earned on a carried interest held for less than three years was taxed as short-term capital gains; a decrease in the highest personal marginal tax rate; and a decrease in the corporate tax rate. The TCJA benefits may be short-lived.
1031 Exchanges – Safe for Now
The outline of tax proposals issued by the House Ways and Means Committee did not mention limitations on IRS Section 1031 Exchanges. That may simply mean that Section 1031 limitations have been moved to the back burner for now, with the Committee now focusing its attention on the following:
Financing for Affordable Housing
Historically, Low Income Housing Tax Credits could be obtained by affordable housing groups and investors if the financing of the development involved at least 50% in private activity bonds (the so-called 50% test). The Committee has proposed reducing the 50% hurdle to 25% for affordable housing projects financed between 2022 and 2028.
The federal deduction for state and local taxes (SALT) is limited to $10,000.00 annually. The Committee seems poised to attack that limit and to enact “a law that will include meaningful SALT relief that is so essential to our middle-class communities…”
Funding Alternative Housing Models
The Committee on Financial Services wants to include $500 million to help create or maintain community land trusts. One example of a community land trust involves the ownership of housing by a non-profit organization that retains ownership of the land and sells or rents the housing on that land to lower income households. In exchange for purchasing homes at below-market prices, owners agree to resale price restrictions that keep homes permanently affordable to subsequent households with similar income levels.
Funding Zoning Reform
The Committee on Financial Services wants to institute a program that will fund $4.5 billion to provide grants to municipalities that enact zoning legislation or policies that are designed to “reduce barriers to housing supply elasticity and affordability” and to reduce segregation.
To be prepared for the future, keep an eye on these proposals and plan ahead by taking advantage of opportunity zone (OZ) investments, and 1031 Exchanges while they are still available.