{"id":1004525384,"date":"2021-04-29T17:50:19","date_gmt":"2021-04-30T01:50:19","guid":{"rendered":"http:\/\/internal.cpexecutive.com\/?p=1004525384"},"modified":"2022-02-21T08:29:43","modified_gmt":"2022-02-21T16:29:43","slug":"biden-tax-changes-could-be-existential-for-cre","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/biden-tax-changes-could-be-existential-for-cre\/","title":{"rendered":"Analysis: How Biden’s Tax Plan Would Reshape CRE Investment"},"content":{"rendered":"
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President Joe Biden. Image by Gage Skidmore via Creative Commons<\/p><\/div>\n

President Biden called on Congress to make tax code changes this week that could hurt commercial real estate investors\u2019 pockets. But the code changes detailed in The American Families Plan could also result in fundamental shifts in how real estate is bought, sold and developed.<\/p>\n

One of the major themes of the president\u2019s campaign<\/a> as well as his first 100 days in office has been equity. Instead of raising taxes on middle-class Americans to pay for the plan\u2019s $1.8 trillion in spending, he is setting his sights on high-earning investors and real estate investors, in particular.<\/p>\n

In the real estate industry, he is taking aim at two tax incentives that are baked into a tremendous number of real estate deals: 1031 exchanges and carried interest for private equity fund managers.<\/span><\/p>\n

\u201cThe administration is looking for ways to limit disparity and the wealth gaps we have in this country\u2014the sort of K-shaped economy that we are emerging into more and more that existed before the pandemic but has been exacerbated by it,\u201d said Bradley Tisdahl, CEO of Tenant Risk Assessment. \u201cBut it would dampen a lot of the upside for folks of inheriting wealth and making money through investment as opposed to through work.\u201d<\/p>\n

1031 Exchanges<\/strong><\/h2>\n

1031 exchanges are used in all property types and across the real estate investor universe. Biden is asking Congress to enact legislation that would disallow 1031 exchanges for gains greater than $500,000.<\/p>\n

\u201cA lot of 1031s are over the limit of $500,000,\u201d said Jonathan Hipp, principal & head of Avison Young\u2019s U.S. net lease group, \u201cand on the private capital side, they are all going to be above that $500,000 capital gains.\u201d<\/p>\n

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READ ALSO:<\/strong> The Benefits of Section 1031 No One\u2019s Talking About<\/a><\/p>\n

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Meanwhile, Biden has proposed raising the long-term capital gains tax rate from 20 percent to 39.6 percent for investors with incomes over $1 million.<\/p>\n

\u201cIt\u2019s a very upsetting proposal for the real estate industry,\u201d said Robert Gilman, co-leader of the Real Estate Group at Anchin. \u201cI think everyone was under the thought (that) tax rates were going up\u2014both capital gains and ordinary rates\u2014but this is a double hit against the industry.\u201d<\/p>\n

Without the 1031 exchange option, someone who buys a property for $5 million and sells it for $15 million no longer has $15 million to re-invest, Gilman explained. Instead, that investor will be paying 40 percent federal tax plus other taxes that could add up to 50 percent of the gains from the sale. That would leave them only $10 million to reinvest.<\/p>\n

If Congress moves to severely limit 1031 exchanges, experts say, there is likely to be an initial rush to sell properties held in 1031 before the change takes effect. That will probably be followed by a drop in the number of property sales transactions and less liquidity in the market.<\/p>\n

\u201cAt the end of the day, incentives add investors to real estate, and now you are doing something that has a potentially negative impact on buyer pools,\u201d said Preston Young, national head of office investor services for Stream Realty Partners, a real estate services and investment and development firm.<\/p>\n

Carried Interest<\/strong><\/h2>\n

The carried interest benefit plays a role in every private equity investment. Carried interest is the fund manager\u2019s share of the profits, when the profits are realized, and it amounts to the bulk of a fund managers\u2019 compensation. It is designed to align the manager\u2019s interests with the investor\u2019s and to incentivize performance.<\/p>\n

Under the current tax code, carried interest is considered return on investment, so it is taxed at the 20 percent capital gains rate rather than the 37 percent regular income tax rate, for those who make over $1 million.<\/p>\n

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READ ALSO: <\/strong>What You Need to Know About Taxation, Valuation in 2021<\/a><\/p>\n

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If Congress approved Biden\u2019s proposal, carried interest would be taxed at the regular income tax rate, which Biden has proposed increasing to 39.6 percent for those earning more than $1 million.<\/p>\n

As a result, fund managers may need to find new ways to structure fees and to allocate the increased cost due to the change in carried interest classification.<\/p>\n

\u201cNow, that just shifts a lot of business plans that may not be viable when you can\u2019t capitalize on the gains tax cap,\u201d said Young.<\/p>\n

But if Biden manages to raise the long-term capital gains tax to 39 percent for all investors, the carried interest change is actually canceled out anyway. \u201cIt\u2019s almost moot,\u201d said Gilman.<\/p>\n

Biden\u2019s plan would also eliminate the step-up in basis for properties and other assets that are inherited. Currently, the basis on a property that is passed on to heirs is stepped up to fair market value at the time of death. The heirs, therefore, pay no tax on any appreciation in value since the asset was purchased because, technically, there is no gain. Take, for example, a property purchased at $1 million that was worth $10 million at the time of inheritance. Under the change, the estate would have to pay capital gains tax on the $9 million gain, Gilman said.<\/p>\n

The Fight Continues<\/strong><\/h2>\n

Last month, more than 30 trade organizations signed a letter to Treasury Secretary Janet Yellen extolling the positive effects that like-kind exchanges have throughout the economy. The groups will continue their lobbying while Congress debates Biden\u2019s tax proposals and structures them into law.<\/p>\n

Jamie Woodwell, vice president for commercial and multifamily research at the Mortgage Bankers Association, said it is too early to tell what shape the tax changes could take, but the effects on liquidity could be decisive.<\/p>\n

\u201cCommercial real estate is probably one of the most capital-intensive industries there is,\u201d said Woodwell. \u201cSo any time you start talking about the way that capital is taxed, you are talking about things that could have a significant impact on investment in the sector.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

All investors will feel the impact of some of the changes, but commercial real estate could be hit particularly hard, experts say.<\/p>\n","protected":false},"author":756,"featured_media":1004527463,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21808,21825,21783,23891,21742],"tags":[51117,33022,34040,33358,51118],"class_list":["post-1004525384","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured","category-finance","category-investment","category-national","category-latest","tag-anchin","tag-avison-young","tag-mortgage-bankers-association","tag-stream-realty-partners","tag-tenant-risk-assessment"],"acf":[],"yoast_head":"\nAnalysis: How Biden's Tax Plan Would Reshape CRE Investment - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/biden-tax-changes-could-be-existential-for-cre\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Analysis: How Biden's Tax Plan Would Reshape CRE Investment\" \/>\n<meta property=\"og:description\" content=\"All investors will feel the impact of some of the changes, but commercial real estate could be hit particularly hard, experts say.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/biden-tax-changes-could-be-existential-for-cre\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2021-04-30T01:50:19+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-02-21T16:29:43+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2021\/05\/48651174447_10b71eda05_k-1-300x233-1.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"300\" \/>\n\t<meta property=\"og:image:height\" content=\"233\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Therese Fitzgerald\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.commercialsearch.com\/news\/biden-tax-changes-could-be-existential-for-cre\/\",\"url\":\"https:\/\/www.commercialsearch.com\/news\/biden-tax-changes-could-be-existential-for-cre\/\",\"name\":\"Analysis: How Biden's Tax Plan Would Reshape CRE Investment - 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She got her start writing about the New York City market with Real Estate Weekly and later joined CPE\u2019s predecessor publication, Commercial Property News, where she held various positions including editor in chief. In addition to working on the CPE and MHN websites, she edits CPE's Capital Markets Newsletter and MHN's Finance & Investment Newsletter. 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