Understanding new policy proposals and their potential impact on your business will help you make the best decisions when it comes to asset protection and estate planning.
The new Biden administration brings a wave of policy shifts that will impact 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 when selling an investment property and invest the gains in another property. Named after IRS code section 1031, this is a much-beloved “hack” for real estate investors.
The exchange can only be made using similar properties, and the rules of the IRS limit the use of this provision with vacation properties. The scheme also comes with time frames that can make it challenging.
The Biden Plan for Mobilizing American Talent includes “rolling back unproductive and unequal tax breaks for real estate investors with incomes over $400,000.” During the election cycle, the Biden administration mentioned taking aim at “like-kind exchanges,” meaning these 1031 exchange programs may be eliminated.
However, legislators from both parties have been taking shots at 1031 exchanges for a while now, and President Trump restricted this option to real property only. Whether the 1031 exchanges will be successfully defeated remains to be seen.
The President’s housing plan outlined a path for every American to have access to housing that is affordable, safe, accessible, energy-efficient, and located “near good schools” with a “reasonable commute to their jobs.”
To that end, Biden’s plan would invest $640 billion over 10 years, with a $100 billion Affordable Housing Fund to construct and upgrade affordable housing. This plan includes zoning laws that would promote more affordable housing around the country.
Landlords in low-income markets would certainly be impacted by the creation of cheaper alternatives for tenants in need of cheaper rent. However, it also creates new opportunities to invest in affordable housing.
Tax credits for first-time homebuyers
Biden has proposed a maximum $15,000 tax credit aimed at helping young, first-time homebuyers make down payments on their starter homes. This will be greater than the $7,500 tax credit under President Bush and the $8,000 credit under President Obama. (Trump rescinded the credit.)
This credit could help new investors start their real estate portfolios.
The U.S. Department of Housing and Urban Development (HUD) establishes the criteria one must meet to be a “first-time homebuyer.” To qualify, you:
- Have not owned a principal residence within three years. This also applies to the buyer’s spouse.
- Have only owned a principal residence that isn’t indefinitely linked to a permanent foundation in line with related laws.
- Have only owned property that violated local, state, or model building codes, and the cost of remodeling for compliance is not higher than constructing a permanent structure.
The Department of Commerce plans to introduce new building energy performance standards for building appliances and equipment. This will inevitably increase the costs of both construction and building maintenance, particularly in commercial real estate, but hopefully lower utility costs and help combat climate change.
The goal is a 50% reduction in emissions by 2035. The Feds may also push tax incentives to help 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 high-tax cities and states.
The Tax Cuts and Jobs Act (TCJA) limited the amount claimed as SALT deductions for tax years between 2018 and 2025. The $10,000 deduction limit is only applicable to taxpayers with a single, married jointly, or head of household filing status. The limit is $5,000 if married and filing separately.
The Biden administration is proposing increasing the SALT deduction alongside the adjusted gross income of taxpayers. The SALT cap repeal would remove itemized deductions for home mortgage interest and state and local taxes. The value of the SALT deduction as a percentage of adjusted gross income (AGI) tends to increase with a taxpayer’s income, so the proposed repeal would impact tax liability for the wealthy, particularly in high-tax states.
The Biden administration is projected to commit an extra $1.6 trillion to develop industrial infrastructure. This would increase demand for industrial real estate. The administration has also promised an extra $5.4 trillion to expand health insurance coverage within the next ten years. This could drive demand for additional medical space and spur the conversion of some retail space into medical facilities.
This additional spending could benefit investors whose properties include clinics and medical offices, as well as other medical property such as materials warehousing and flex-office space. Investors may also be smart to look into converting their properties to healthcare-related spaces where feasible.
The former deadline for the foreclosure and eviction moratoriums was January 31; the Centers for Disease Control and Prevention (CDC) authorized an extension of the moratorium through June 30, giving renters an extra few months. There remains speculation about possible additional extensions.
With extensions, more landlords and real estate investors will be unable to evict tenants who are unable to pay their rent. The best way to manage this is for property owners to negotiate new payment plans with their tenants, which can lead to both happier tenants and happier landlords. Some rent payments are better than none, and it’s a difficult market for finding new tenants.
Many small investors and landlords are struggling, but Biden has said that he plans to help mom-and-pop landlords once these policies are enacted.