By Gail Kalinoski, Commercial Property Executive Digest
President Donald Trump has made a few new campaign promises, but the differences between him and Joe Biden are clear on key commercial real estate issues. With the presidential elections drawing closer and the race between President Donald Trump and former Vice President Joe Biden getting tighter, economist Ken Rosen has some advice for commercial real estate owners: “If I owned a lot of real estate and wanted to do a 1031, I would do it now.”
Rosen, chairman of Rosen Consulting Group and Fisher Center for Real Estate and Urban Economics at the Haas School of Business at the University of California, Berkeley, said Biden has proposed eliminating the 1031 exchange to pay for his $775 billion child care and elder care plan. Used to defer capital gains, Trump’s 2017 Tax Cuts and Jobs Act saved the tax exchange utilized for decades by real estate investors. Biden has also proposed raising the capital gains tax rate for individuals with incomes higher than $1 million and raising the top individual tax rate from 37 percent to 39.6 percent. He has proposed taxing carried interest, used in many real estate partnerships, and treated as a long-term capital gain, as ordinary income.
“Raising the capital gains (tax rate) and eliminating the 1031 would create a 20 percent decline in commercial real estate values. Real estate would be subject to the capital gains tax at a very high rate,” Rosen said.
To date, 1031 exchanges have provided liquidity in the CRE market, particularly during times of market stress like the Great Recession in 2008 and 2009, explained Mike Flood, senior vice president, commercial/multifamily policy, and member engagement at the Mortgage Bankers Association.
“When I think of times when the market was illiquid, like in ’08 and ’09, it was the only thing that could keep markets moving,” said Jeffrey DeBoer, president & CEO of the Real Estate Roundtable.
Biden’s proposed change on capital gains could depress deal activity, especially if linked with loss of the 1031 exchange because investors would retain assets longer, noted Matthew Berger, vice president of tax at the National Multifamily Housing Council. While Trump has not released tax policy proposals as part of his reelection campaign, he has pointed to the TCJA as a signature piece of legislation. He has talked in general terms on the campaign trail about initiating more relief for lower-income and middle-income taxpayers but not provided details.
OPPORTUNITY ZONES DEBATED
The TCJA also introduced Opportunity Zones, which encourage private development in low-income areas, with the deferment of capital gains and reduction of tax liabilities. While critics say there has only been about $10 billion invested and the projects have not improved economic conditions for residents, the Trump administration claims that $75 billion was raised by Qualified Opportunity Funds by the end of 2019.
In August, Trump issued an executive order directing more federal agencies to move their offices into Opportunity Zones and later said the program would be expanded but did not offer specifics.
Biden and fellow Democrats have increasingly called for changes to make the program more transparent, calling for more disclosures on projects getting tax breaks and for developers to be held accountable for direct benefits to communities.
CCIM Institute President Eddie Blanton, principal & senior adviser with Tradd Commercial in Charlotte, N.C., said while there had been “an influx in investment capital” in Opportunity Zones, the approval process can be a lengthy one depending on the location. But he called it a very important program for capital formation and said CCIM would support enhancements.
DeBoer said he expects a review and changes no matter which administration is in charge next year but doubts Congress would repeal it.
“The issue will boil down to be is there an opportunity within the Opportunity Zone for minorities and women-owned businesses for them to participate in this. That’s certainly a legitimate debate to have,” DeBoer said.