Prognosticators have labeled the 2020 presidential election one of the most consequential in U.S. history — or, at least, since 2016. The country has voted for presidents during times of strife before, including recessions, depressions, a civil war, world wars, and a few unpopular wars. But the fact that this election is being held during an economy-wrecking pandemic and amid civil unrest makes it one of the most unique in our history, as does the unknown surrounding the timing of the results: Will voters find out who the next president is in the wee hours of Nov. 4 or some days later as the result of a court decision?
Regardless of when or how a winner is declared, the outcome will have important ramifications on the economy, particularly when it comes to tax policy. President Trump’s stake has been set with the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), which largely lowered ordinary rates and introduced programs designed to incentivize investment. He has proposed some tweaks and additional measures to further boost investment.
The Biden campaign has released a detailed tax plan that, in Biden’s own words, will create a “more progressive and equitable tax code” by repealing changes to individual income tax rates in the TCJA and eliminating loopholes that favor wealthy individuals and corporations, among other measures.1
But what exactly would four more years of a Trump presidency or the first four years of a Biden presidency mean for commercial real estate investors? To get an idea, we’ve taken a look at the programs and policies that are of significant interest to the industry.
1031 Like-Kind Exchanges
Biden is proposing to eliminate 1031 like-kind exchanges to help finance his $775 billion “caring economy” plan, a move that would arguably have the most dramatic impact on the commercial real estate industry. Like-kind exchanges allow property investors to defer paying capital gains taxes on the sale of a commercial property by rolling the sale proceeds into another property within a certain time period.
Under the plan, which is geared toward boosting spending on care for children and the elderly, a Biden administration would roll back what it considers to be “unproductive and unequal tax breaks for real estate investors with incomes over $400,000.”2 The proposal does not specifically mention 1031 exchanges, but a campaign official last summer indicated that a Biden administration would indeed target the tax deferral vehicle and would also prevent investors from using real estate losses to lower their income tax bills.3
Neither Trump or his aides have released or publicly discussed plans to alter 1031 exchanges.
It’s not the first time that candidates or lawmakers have suggested modifying or ending the 1031 exchange program. Most recently, some members of Congress called for its elimination to pay for the tax rate cut in the TCJA.4 In the end, Congress changed the program to primarily prevent personal property assets, including aircrafts, vehicles, livestock, and artwork, from qualifying for deferral.5
Opportunity Zones
The opportunity zone program was part of the TCJA and generally allows investors to defer capital gains taxes, possibly reduce them, and potentially eliminate new capital gains taxes on their subsequent investment if they invest the gains in one of the 8,700 communities identified as economically distressed. The White House Council of Economic Advisers estimated that $75 billion had been invested in opportunity zones in 2019.
Biden and others have criticized the lack of opportunity zone investment transparency and the inability to measure the extent to which the program has actually helped underserved communities versus simply promoting gentrification. Biden has not proposed ending the opportunity zone program. Instead, his plan is to make tweaks that will provide “clear economic, social and environmental benefits to a community.”6
Among other changes, a Biden administration would incentivize funds to partner with non-profit or community organizations and produce a community benefit plan for each investment.7 It would also establish a Treasury Department review of opportunity zone rules to ensure the program is staying true to its mission and would require developers to provide detailed reporting and public disclosures regarding the goals of their projects.8
The Trump administration is exploring ways to expand the opportunity zone program and to extend deadlines associated with it, but it has not released any firm proposals.9 In June, the Treasury provided some temporary extensions due to investment, business and construction delays caused by COVID-19 and the economic shutdown. Trump also issued an executive order in August that directed federal agencies to give priority to opportunity zones or other distressed areas when considering a move or relocation.10
Other Considerations
- Capital Gains
Trump has proposed reducing the long-term capital gains tax rate for high earners from 20 percent to 15 percent and indexing capital gains to inflation. Under Biden, the gains would be taxed at ordinary rates for taxpayers with annual income of more than $1 million.11 - Carried Interest
Biden supports taxing carried interest immediately at ordinary income rates. Under the TCJA, carried interest held more than three years is generally taxed at long-term capital gain rates.12 - Pass Through Vehicles
The TCJA provides real estate holding entities, such as partnerships, S corporations and limited liability companies, with a deduction equal to 20 percent of the net income from each rental property activity, subject to limits based on income thresholds. In some cases, that has translated into an 80 percent tax savings.13 Under Biden’s plan, the deduction would be phased out for earners of more than $400,000.14 - Stepped-Up Basis
Currently, when property passes to an heir or business partner upon death, the transfer includes a step-up in basis to fair market value on the date of passing. The transfer also assumes that the heirs or partners have already held the property for more than one year, which provides the recipients with long-term capital gain treatment if they happen to sell the asset in short order.15A Biden administration would eliminate the step-up in basis, in which case the original basis would transfer to an heir or business partner upon inheriting an asset. Among other consequences, if a partner has a negative account balance, the loss of the step-up would mean the recapture of debt-financed deductions and distributions.16 Additionally, the transfer of property upon death would be considered a sale for fair market value at the time of passing, and the recipient would be subject to income tax on the “built-in gain.”17
Time will tell
No one would argue that the upcoming presidential election isn’t a big deal. The candidates have two distinct tax policies, and voters will ultimately decide which vision will guide the U.S. into the future. Given that Congress writes tax law, however, nothing regarding the candidates’ policy proposals is certain. Thankfully, the one certainty we can look forward to is that Nov. 3 will mark the end of those ceaseless campaign commercials, emails, phone calls and text messages. At least temporarily.
1. https://finance.yahoo.com/news/joe-bidens-2020-tax-plan-122021635.html
2. https://thediwire.com/wp-content/uploads/2020/10/Biden-Plan.pdf
3. https://www.bloomberg.com/news/articles/2020-07-21/biden-proposes-775-billion-plan-funded-by-real-estate-taxes
4. https://www.fa-mag.com/news/using-trusts-to-ease-capital-gains-34370.html
5. https://www.murphydesmond.com/tax-reform-and-the-change-to-irs-code-section-1031-likekind-exchanges-starker-exchanges
6. https://deloitte.wsj.com/riskandcompliance/2020/10/07/tax-policy-implications-of-the-2020-presidential-election-the-biden-proposals/
7. https://joebiden.com/latino-agenda/
8. https://therealdeal.com/2020/08/24/heres-what-a-president-biden-would-do-to-opportunity-zones/
9. https://www.npr.org/2020/05/22/859697610/white-house-looks-at-opportunity-zone-extension-in-wake-of-covid-19
10. https://news.bloombergtax.com/daily-tax-report/trump-order-is-latest-effort-to-bolster-opportunity-zones
11. https://www.fool.com/taxes/2020/08/23/12-tax-changes-joe-biden-wants-to-make/
12. https://deloitte.wsj.com/riskandcompliance/2020/10/07/tax-policy-implications-of-the-2020-presidential-election-the-biden-proposals/
13. https://www.lgallp.com/resources/real-estate-investors-tcja-benefits/
14. https://www.taxlawforchb.com/2020/08/bidens-tax-proposals-for-capital-gain-like-kind-exchanges-basis-step-up-the-estate-tax-tough-times-ahead/
15. https://www.taxlawforchb.com/2020/08/bidens-tax-proposals-for-capital-gain-like-kind-exchanges-basis-step-up-the-estate-tax-tough-times-ahead/
16. https://www.taxlawforchb.com/2020/08/bidens-tax-proposals-for-capital-gain-like-kind-exchanges-basis-step-up-the-estate-tax-tough-times-ahead/
17. https://www.taxlawforchb.com/2020/08/bidens-tax-proposals-for-capital-gain-like-kind-exchanges-basis-step-up-the-estate-tax-tough-times-ahead/