Five policies from the Biden administration that could affect the multifamily housing industry

real estate investment market report on the multifamily housing industry

Although the 2020 election felt more like an election week than an election day, ultimately Joe Biden emerged as the new President of the United States. As the smoke has cleared on the election itself, attention has turned to President Biden’s administration. As private equity lenders, we are naturally examining what the new administration will mean for the real estate development market. Specifically, what will the new administration’s policies mean to a housing market that has shown strength despite an economy that has been heavily impacted by the pandemic?

Capital Gains Tax Increases

Many owners of multifamily property face capital gains taxes when they sell their buildings. Currently, the maximum capital gains tax rate for assets held over one year is 20 percent. For taxpayers earning over $1 million, President Biden would like to increase this rate to 39.6 percent. In addition, he has proposed taxing unrealized capital gains at death and eliminating step-ups in basis, which adjust the value of an asset for tax purposes upon its inheritance. The details on how this proposal would work are as of yet unspecified.

 Elimination of Like-Kind Exchanges

President Biden has also mentioned eliminating like-kind exchanges, which allow investors to exchange their properties for other comparable properties without recognizing the tax implications of gains or losses. Such exchanges play a role in the multifamily housing sector by encouraging investors to remain vested in real estate while allowing them to shift resources to properties that better fit their portfolios or change geographic locations.

 Expansion of Affordable Housing

President Biden has said he will invest $640 billion over 10 years to provide affordable, safe, and energy-efficient housing near schools and jobs. The idea is to reduce the strain of commuting in order to promote employment retention, create better jobs for Americans, and improve school performance. $100 billion of that amount would be for an “Affordable Housing Fund” used to provide incentives to develop or rehabilitate low-cost, energy-efficient housing where there are supply shortages.

According to his plan, “These funds will be directed toward communities that are suffering from an affordability crisis and are willing to implement new zoning laws that encourage more affordable housing.”

Though well-intentioned, this policy, unfortunately, may not do enough to offset the increasingly prohibitive costs of construction in some of the cities most in need of affordable housing.

That said, President Biden also plans to provide tax incentives for the construction of more affordable housing in communities that need it most. This includes expanding the Low-Income Housing Tax Credit (LIHTC), a provision intended to incentivize the construction or rehabilitation of affordable housing.

The President has also promised to help more Americans achieve homeownership by providing a down payment tax credit of $15,000. The credit would be available to homebuyers immediately. This additional financial flexibility could also help spur more activity in the national housing market. Moreover, the new administration has raised the possibility of additional discounts for educators and first responders.

If passed, in addition to being beneficial for those in dire need of housing, this initiative could mean good news for real estate investors, as it may increase activity in lower price tiers.

 Tax Credits for Sustainable Energy Technology

The Biden Administration is also likely to expand the Solar Investment Tax Credit (ITC), a tax credit for solar energy systems installed on residential and commercial properties. Individually, the residential and commercial tax credits in the program each equate to 26 percent of overall investments in solar-enabled properties. The ITC then decreases according to the following schedule:

  • 26 percent for projects that begin construction in 2021 and 2022;
  • 22 percent for projects that begin construction in 2023; and
  • For projects beginning construction after 2023, the residential credit drops to zero, and the commercial credit drops to a permanent 10 percent.

Eligibility for the tax credit is based on “commence construction” standards. The IRS has set guidelines that explain the requirements taxpayers must meet to claim the credit.


The Removal of the SALT Cap

In 2017, Congress passed the Tax Cuts and Jobs Act, which put a $10,000 cap on the itemized tax deduction for state and local taxes paid. Previously there was no limit. The new administration has discussed removing the cap and reverting to the previous policy of unlimited deductions. Since tax rates vary by state and municipality, removing the state and local tax (SALT) cap would mostly benefit those living in higher-tax areas. Moreover, it could incentivize those who have migrated away from these high-cost areas during the pandemic to move back. According to ABC News, “The locales with the highest average SALT deduction, which would all see the greatest benefit, are – in order – New York, Connecticut, New Jersey, California, Washington, D.C., Massachusetts, Illinois, Maryland, Rhode Island, and Vermont.”

On the flip side, the Tax Foundation notes that if the new administration repeals the SALT cap, the Federal Government could lose $673 billion in revenue over the next ten years.

Whether or not these policies come to fruition, they present both opportunities and issues for the ever-evolving housing market in the U.S.

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.

Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.

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