For many in the real estate industry, having a developer in the Oval Office has brought an uncomfortable amount of media attention to a long-standing practice: avoiding taxes.
A series of recent articles in The New York Times and other outlets have showcased the many ways developers and investors use tax breaks to lower their bills — sometimes to zero. And with the election in motion, some are feeling nervous.
“It kind of reminds me of when you’re in grade school and there’s one kid in the class that brings attention to something and ruins it for everybody,” said Peter Elias, a partner at Pillsbury Winthrop Shaw Pittman who specializes in tax law.
Joe Biden has already signaled he wants to axe certain tax breaks beloved by real estate, and with the pandemic and media coverage pushing income inequality back into the national conversation, industry insiders are steeling themselves for changes.
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In July, Biden announced he would eliminate 1031 “like-kind” exchanges for high-earning investors to help pay for his $775 billion “Caring Economy” plan. The popular exemption, which is so ubiquitous it is often used as a verb, allows real estate investors to defer capital gains taxes by swapping one investment for another.
Announcing his plan at a fundraiser hosted by a top Blackstone executive, Biden called the tax program “unproductive.” Real estate professionals, however, call it a key driver of investment.
Francis Greenburger, CEO of real estate firm Time Equities, wrote to the Biden campaign, arguing that the Democrat’s intention to eliminate the real estate exemption for 1031 tax exchanges would hinder investment when the economy is struggling. Others warn that eliminating like-kind exchanges could also lead companies to hold assets and rely more on debt financing; and an industry study from 2015 predicted its elimination could reduce GDP by $8.1 billion.
The Biden campaign has not announced plans to eliminate other tax provisions that favor real estate. Still, investors suspect that some of their favorite tax provisions are in the campaign’s sights — especially given the coverage of Donald Trump’s use of the policies to pay no federal income tax for years and only $1,500 over two years of his presidency.
Many observers expect Biden would roll back a rule that lets heirs wipe out the tax liability on capital gains by resetting the value of the property they inherit.
Allowing heirs this stepped-up basis plays a major role in building multi-generational wealth. Repealing it, coupled with the elimination of the 1031 exemption, would increase income taxes and affect property owners’ decisions, said Alvin Schein, a partner at New York City development firm Seiden and Schein.
“It is likely that many properties whose owners would face huge tax hits on sale would simply not be sold,” he said.
In their 2017 tax law, Republicans also doubled the estate tax exemption, shielding from taxation the first $22.8 million a couple leaves behind. (In 2001, that number was $1.35 million.) Between that and the stepped-up basis, a family can pass appreciated real estate from one generation to the next without ever paying a dime in capital gains tax.
Through media coverage of Trump’s finances, more Americans became aware of a tax-reducing technique called depreciation, which provides for a write-off as purchases such as machinery lose value over time. But landlords can take depreciation on their buildings, even if they increase in value. Depreciation was not only preserved but accelerated — twice — during Trump’s presidency.
Some industry players, including Greenburger, are concerned that if a Biden administration were to alter property tax rules beyond the 2017 Trump overhaul, it could severely disrupt economic activity.
“Hopefully the Biden administration would be listening to consider the overall effect on the economy, not just what seems politically advantageous,” Greenburger said.
Such arguments largely succeeded in protecting real estate’s coveted tax breaks after the 2008 election — and the financial crisis — swept Democrats into power in Washington. (When the economy is humming, business interests warn tax increases would kill the golden goose.)
One factor which could intensify pressures to roll back the 2017 Tax Cuts and Jobs Act is its projected cost. The Congressional Budget Office found that the law will add $1.9 trillion in debt over 11 years, starting in 2018. Nevertheless, details of the Biden tax plan remain unclear, and decisions after the election, including cabinet appointments, could determine the extent of any rollbacks.
“It’s one thing for [the Biden administration] to go back through all the Trump tax cuts. It’s another thing to start tinkering with every specific regulation affecting real estate,” Greenburger said. “The result of that will be severe economic destruction, which is the last thing we need.”
But such concerns may be overblown.
“Biden is not exactly Elizabeth Warren,” said Brian Lancaster, a senior lecturer at Columbia University Business School, noting that Biden, a moderate, has a reputation for being more pro-business than many of his colleagues.
There’s also the matter of where he draws support.
“If you think about the Democratic Party, a lot of their support comes from urban centers and urban centers are where most commercial real estate value is,” Lancaster said, adding that if the party wants to support cities, either by eliminating the SALT tax deduction cap or providing federal aid to depleted states, the real estate industry would actually benefit from a Biden presidency.
What’s not up for debate, however, is that the election winner will have the unenviable responsibility of getting the economy back on its feet as virus cases are surging across the country.
Washington may be reluctant to take aim at the real estate industry — an economic driver — when it is in such a weakened state.
In the meantime, with major social and political movements reshaping the country, media coverage of Donald Trump’s tax avoidance and the economic tools deployed by the rich are laying the groundwork for changes to America’s tax code, which has long favored real estate.
“I do think it could put some pressure on it,” Lancaster said. “It’s just a question of where.”