Biden’s CRE Tax Deduction Kill List Is Back

You might have taken it for an April Fool’s joke, except no such chance as the Biden administration is serious. Like last year, it wants to end or severely restrict a number of tax strategies popular among CRE professionals. Except, this year, there was no advanced warning. Instead, word came through the White House’s budget.

While some organizations noticed the effective rollback of the 1031 exchange for professionals, there are in fact a number of deductions on the firing line.

“Oh, my God” are the first words that Al Lord, founder and CEO of Lexerd Capital Management, tells GlobeSt.com. “That was eye-opening. No one’s talked about that at all. The 1031 piece of it is especially hard-hitting for real estate professionals, individuals, and real estate firms. I think it’s shocking that the 1031 is in there again after the Democratic Congress took it out of their budget.”

If adopted by Congress, the restriction of like-kind exchanges would be one of ten “loopholes” Biden seeks to close. The approach the administration desires “would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million in the case of married individuals filing a joint return) each year for real property exchanges that are like-kind.” Biden and company argue that, taken together, the cuts would be worth $68.1 billion over ten years.

The “1031 exchanges are an important tool in spurring economic activity and construction” and a cessation of their use could affect more than half of all real estate transactions, Francis Greenburger, CEO and chairman of Time Equities, estimates. 

“There’s [another] thing worrisome about the 1031 proposal,” Michael Wiener, a partner in Greenberg Glusker’s corporate, finance and securities practice group, tells GlobeSt.com. That’s the 180-day rule for completing the transaction.

“It says that the proposal would be effective for exchanges completed after December 31, 2022,” Wiener says. “As you get into the second half of this year, people are going to say, ‘I might not have 180 days. I might have 170 days or 150.’ The 1031 change is a big deal.”

There are other tax treatments like carried interest under fire. “Getting rid of carried interest would definitely be an issue, especially if you combine it with the elimination of 1031,” Wiener says.

“Substantial revenues come from strengthening the taxation of high-income taxpayers,” explanatory information from the administration states. “Income tax rates for those with the highest incomes would increase. Reformed taxation of capital income would even the tax treatment of labor and capital income and eliminate a loophole that lets some capital gains income escape income taxation forever. For extremely wealthy taxpayers, a minimum income tax would require prepayment of taxes on unrealized capital gains, such that liquid taxpayers are taxed at a rate of at least 20 percent on their income including unrealized capital gains.”

The ultimate question is whether such measures will pass, especially through a Congress with thin Democratic margins and previous opposition.

“This exchange changes look good on paper because they reduce the budget, but there are too many powerful groups that oppose the changes, so they will not pass,” Bryan Shaffer, principal and managing director of George Smith Partners, tells GlobeSt.com.