A Democratic blue wave would be bad for the real estate industry

Biden has proposed a number of major tax increases that would, if enacted, have a seriously negative impact on real estate investors. Democratic members of Congress also have put forward a number of proposals specifically targeting the real estate industry. If the blue wave hits, it could sweep away like-kind exchanges, capital gains, carried interest, opportunity zones, expanded depreciation, and other tax incentives used by real estate investors.

A prospective Democratic government would be expected to move quickly in the first quarter of 2021 to enact a fiscal package with new spending increases and tax increases to offset a portion of the total cost. Here are some of the tax increases affecting the real estate industry that could be included in the package next year:

• Like-kind exchanges: Biden has proposed eliminating like-kind exchanges, which allow a real estate investor to defer capital gains taxes on a property if that gain is reinvested in another “like-kind” property. This provision, which has been in the tax code for a hundred years, is designed to encourage investment in real estate and discourage increased debt. This proposal would also prevent investors from using real estate losses to lower their tax bills.

• Individual tax increases: Biden has proposed a number of tax increases that would impact real estate partnerships, LLCs, S Corps, and individual investors. He would increase the top individual tax rate to 39.6%, impose the 12.4% payroll tax on income above $400,000, and cap all itemized deductions.

• Capital gains: Biden would couple the elimination of like-kind exchanges with a proposal to raise the top capital gains tax rate to the highest level in U.S. history, a one-two punch that would have a devastating impact on the already reeling real estate industry. He proposes to tax capital gains as ordinary income, raising the top capital gains rate from 20% to 39.6%. With the Medicare investment tax of 3.8%, the maximum capital gains tax would be raised to 43.4%, almost doubling the rate.

• Carried interest: The Democratic Party platform calls carried interest one among a series of “unproductive tax loopholes” and pledges to repeal it. The Biden plan to tax capital gains as ordinary income would effectively eliminate carried interest.

• Opportunity zones: Biden has said he would reform opportunity zones by imposing new certification, disclosure, and reporting requirements. But his capital gains proposal would negate much of the benefits of opportunity zones, which offer lower capital gains rates to encourage investments in the zones. Democrats in Congress have introduced legislation to repeal opportunity zones, and Democratic Sen. Ron Wyden of Oregon, who would be the new chairman of the Senate Finance Committee in a Democratic Senate, has proposed eliminating opportunity zones that are not in low-income communities.

• Trump tax cuts: Biden has said he would repeal the Trump tax cuts on day one, as have many Democrats in Congress. While it is unlikely they would repeal the entire tax cut, they have targeted for repeal a number of provisions that benefit the real estate industry, including the lower corporate tax rate, expanded depreciation, and the qualified business income deduction for pass-through businesses.

The pandemic has caused tremendous disruption in the U.S. real estate industry, with all sectors facing financial difficulties and uncertainty. These potential tax increases would have a very negative impact on the industry, the millions of people it employs, and on the broader economy as it struggles to come out of the recession. The uncertainty caused by these potential tax increases over the next six to 12 months could have a chilling impact on investment, hiring decisions, and the economic recovery.

Bruce Thompson was assistant secretary of the Treasury for legislative affairs during the Reagan administration and the director of government relations for Merrill Lynch for 22 years.