Senator Charles Schumer and President-elect Joe Biden (Getty)
When Joe Biden won the 2020 election, there was a significant hurdle between the president-elect and some of the real estate reforms he wanted: a Republican Senate.
That changed on Wednesday when two Democrats won Senate seats in Georgia. Biden’s proposals stand a better chance of having their say with Democrats, who hold half the Senate seats. Kamala Harris stands ready to cast votes as Vice President and Senator Charles Schumer, D-New York, as majority leader.
However, such strict controls hardly guarantee that Biden’s campaign priorities will become a reality. Democrats need at least 60 votes to beat a filibuster, which means they have to win over at least 10 Republicans – a virtual impossibility for anything controversial or partisan, like eviction bans or the repeal of the 2017 tax bill.
However, a workaround known as reconciliation allows the Senate to pass some tax and spending measures by simple majority. Republicans used it to pass the 2017 reform as well as the 2001 and 2003 tax cuts. The Democrats used it for some elements of Obamacare.
As a result, the real estate industry is observing a number of policies and tax breaks that Biden highlighted or proposed in response to the pandemic during his campaign. They include:
Tax Deductions and Tax Rates
The Tax Cuts and Jobs Act of 2017 capped state and local tax deductions to $ 10,000, allegedly increasing the cost of living and home ownership in high-tax countries like New York, California, and New Jersey. Last year the House Democrats passed a bill that would have raised the cap to $ 20,000, but the Senate ignored it. Such a measure would have it easier with the Senate under the leadership of Schumer, who speaks out against the upper limit, as well as with many democrats of the blue state.
Biden has said he plans to increase taxes for high earners on payroll, capital gains and income. He also proposed raising the corporate tax rate from 21 percent to 28 percent after Republicans cut it from 35 percent in 2017. While this would cost some real estate companies more, it could benefit affordable property developers.
An increase in the corporate tax rate could make the tax credit more attractive for lower-income residential properties. Corporate investors who purchase the loans will receive a 10 year discount on federal income tax. Hence, the loans are worth more when there is more tax to offset. When tax rates go down, loans lose value. This affects how a project works.
Aaron Kaufman of the Hudson Companies said he was in the process of negotiating loan terms with a bank on an affordable housing project just before the 2017 tax bill was passed. The ability to lower the corporate tax rate shaped debt terms as many expected the tax credits to depreciate. An increase in the corporate tax rate could help reverse this.
“It will increase the price per dollar in tax credits,” he said. “It is a breakthrough win to raise corporate taxes.”
As part of the recent federal stimulus package, Congress separated the program’s interest rate from interest rates and instead set a floor of 4 percent. The change was seen as a huge win for affordable property developers.
1031 exchanges
During his campaign, Biden announced a plan to cut 1,031 exchanges for taxpayers with annual incomes in excess of $ 400,000.
The widespread tax break has been on the books for 100 years. A 1031 exchange enables property investors to defer capital gains taxes on property sales when they use the proceeds for new investments, usually within a few months. Keep doing this and taxes can be permanently deferred. Calling this “swap till you drop,” one financial adviser estimated that 1,031 exchanges can make $ 100 billion in real estate sales annually.
The perk is popular with retirees, but with the Democrats in control of both houses of Congress, elimination could emerge for high earners – an opportunity that affects federal property lobby groups. The developer Francis Greenburger described 1031 stock exchanges as “an extremely important element in real estate investments”.
“There will be enormous unintended consequences if you are allowed to do what he has suggested,” said Greenburger, a longtime Democrat.
Greenburger, who wrote to the Biden campaign after the former vice president announced his intention to limit the benefits, said he and others in the business community recognize the need to raise taxes as the country goes through a long and costly pandemic has to fight.
“Anyone who is not blind and stupid knows that we have a big deficit,” said Greenburger. However, changing the basic structure of the tax code is not the way to close it, he said.
“Increase the rate,” Greenburger offered. “That doesn’t disrupt entire business processes and entire areas of activity and investment.”
Opportunity Zones
Biden has pledged to reform the Opportunity Zone program, which began as part of the 2017 Republican tax revision. Although President Donald Trump has touted the program as a boon for “neglected neighborhoods,” others have argued that it will primarily benefit developers.
The states selected the 8,700 zones, which were then certified by the U.S. Treasury Department. Critics have called for a re-examination of these zones – some of which include affluent neighborhoods – as well as greater transparency and reporting requirements to ensure that they are actually helping poor people.
“The problem with the Opportunity Zone legislation is that it has been blown,” said Ronald Fieldstone, partner at Saul Ewing Arnstein & Lehr, who focuses on tax law, noting that the program does not require public disclosure. “There is no accountability.”
In November 2019, Oregon Senator Ron Wyden introduced laws that would increase reporting requirements and restrict opportunity zones to low-income communities.
Next round of stimuli
Senate Majority Leader Mitch McConnell blocked a proposal for $ 2,000 stimulus checks in December, leading to the passage of an aid package that instead sent $ 600 checks to Americans. Schumer, who will take McConnell’s place, has announced that he will make $ 2,000 checks a priority.
Some New York officials are confident that the state will benefit from its own Senate leadership. Governor Andrew Cuomo said Wednesday that a democratically controlled government would result in a more favorable federal incentive as well as a reversal of the steps taken by Congressional Republicans that damaged New York.
“They were unethical. They were political, “he said during a press conference on Thursday. “They took money out of this state and sent it to the republican states as a purely political exercise.”
According to federal lobby groups, a democratically controlled congress with Biden’s support would prefer a means-tested approach to rent relief in the form of rental vouchers. The industry has supported such an approach – which is seen as a welcome measure to stabilize the rental market – as opposed to proposals to cancel the rental.
Federal eviction moratorium
The temporary federal restrictions on evictions stem from a rule by the Centers for Disease Control in September that allows some tenants to use financial hardship as protection against evictions. The rule expires on January 31, but with both houses of Congress under Democratic control, a new bailout package could curb evictions even further.
One such proposal was made public in October when the House of Representatives passed a $ 2.2 trillion bailout package that would have halted evictions for 12 months – and even exceeded New York’s five-month ban.
This measure would not only have given tenants a defense against evictions, but also prevented landlords from filing evictions for non-payment. The bill would also have given automatic indulgence to criminal borrowers. It contained $ 50 billion in emergency rental assistance, twice the amount approved by the Republican-controlled Senate.
Any revival of a lengthy eviction ban would have to raise 60 votes to avoid a Republican filibuster.
Contact Georgia Kromrei
Contact Kathryn Brenzel