As a follow-up to his $ 2.3 billion infrastructure package, President Joe Biden has launched a $ 1.8 billion plan to address other priorities, including education and child care. To pay for the plan, the White House has proposed raising taxes on wealthy Americans, describing its tax reform package as one that “rewards work, not wealth.”
“‘The current proposal to increase the capital gains tax may affect a broader segment of Americans than was initially anticipated.’ ”- George Ratiu, Senior Economist, Realtor.com
The proceeds from the sale of a home in addition to these homeowners’ other income “could push more of them to the $ 1 million plus level, causing a notable loss in appreciation if the current proposal were enacted,” he said Ratiu. If that happens, homeowners will likely respond in two ways, said Ralph McLaughlin, chief economist and senior vice president of analysis at real estate finance company Haus. “It’s a double-edged sword,” McLaughlin said. “For those who were thinking of selling in the next few years, the policy may prompt them to sell their investment properties sooner.” That could inject a much-needed supply into the housing market at a time when buyers are scrambling to find homes to buy. But it could have the opposite effect in the long run, McLaughlin warned. “I’m afraid the policy may lock in investors for a much longer period of time than at the current rate and therefore backfire in helping to free up investors’ inventory,” McLaughlin said. Alternatively, some argue that the higher tax rate could simply cause wealthier Americans to reevaluate where to park their money. “I speculate that this increases the incentive for high-income individuals to invest in Opportunity Zone funds and therefore could spur additional development there,” Marr said. Eliminating the 1031 exchange could lower property prices The 1031 exchange “has been a cornerstone of commercial real estate investment property,” Ratiu said. A 2020 report from the National Association of Realtors found that 12% of sales transactions involved a similar exchange between 2016 and 2019. Overall, the beneficiaries of these policies were small investors, the report noted. Almost half (47%) of the properties involved were held by investors in sole proprietorships, while 37% were owned by small corporations.
“About 84% of the properties involved in 1031 exchanges were owned by small investors, according to data from the National Association of Realtors. ”
“Removing this provision would likely lead to a downward adjustment in property prices,” Ratiu said, adding that, as a result, investors can hold properties for longer. Residential real estate markets would be affected. Just over half of the properties involved in the 1031 exchanges were residential properties, including single-family rental homes, apartment buildings, and condominium units. Past Tax Reforms Offer Reason for Optimism This would not be the first time there have been changes to the tax code. fears of a real estate recession. It was the same case when President Donald Trump signed into law the Tax Cuts and Jobs Act of 2017. The Republican tax reform package lowered the mortgage interest deduction and eliminated the ability to deduct state and local taxes. “There was concern about the negative effects in the high-cost markets, but these seem to have been outweighed by the more important dynamics of supply and demand,” said Tendayi Kapfidze, chief economist at LendingTree. Some projected that the tax burden could trigger a larger wave of emigration from costly coastal real estate markets than was already occurring at the time. But the 2020 Census data presents a murky picture, and it’s not clear that high taxes alone have caused many changes in people’s real estate decision-making.