As the Biden Administration prepares to take over the White House, news outlets are focused on the incoming president’s agenda for vaccines, COVID-19 economic relief and foreign policy. As a real estate investor what you will be interested in hearing is Biden’s ambitious agenda for residential real estate targeting the low and middle income classes. The intended goal is to facilitate homeownership as well as ease the economic strain facing many renters.
Annual rental increases and home appreciation have far outstripped wage growth for years. Policy going forward appears to be headed in the direction of protecting the affordability of adequate housing for lower and middle income Americans. How quickly the aforementioned policies or some alternative policies with similar goals in mind are adopted could hinge on the runoff election for the Senate seat in Georgia this coming January. Should the Senate remain under control of the Republican caucus, legislative passage of the contemplated government programs may be delayed until the next major election year in 2023. Either way, help appears to be on the way to assist those Americans having difficulty meeting their basic housing needs.
Here are some of the Biden initiatives in the pipeline:
1. Tax credit for New Home Buyers and certain renters Under the First Down Payment Tax Credit program, first time home buyers would be eligible for a $15,000 tax credit upon the purchase of a home. Most certainly, this will benefit some renters who felt homeownership was out of reach to enter the market for a home. However, with the dearth of inventory and bidding wars for existing inventory, the tax credit may only exacerbate the price appreciation of the existing homes for sale and have a boomerang effect, thus actually putting home ownership out of reach for some current homebuyers.
On the rental front, renters who spend more than 30% of their income on rent would be eligible for a refundable tax credit. This would obviously benefit renters financially, but it also increases the likelihood of landlords getting paid the full monthly rent.
2. Expansion of Affordable Housing
The incoming administration proposes creating a massive $100 billion Affordable Housing Fund to construct and upgrade affordable housing. The majority of the fund would provide incentives to develop and rehabilitate low-cost housing where there is a shortage with the goal of alleviating an affordability crisis. More specifically, Biden’s proposal requires states receiving community development or transportation grants from the federal government to incorporate inclusionary zoning into their plan and require that a portion of new construction be set aside for affordable housing. This plan could be a factor in increasing the housing supply, which would be a relief to a struggling entry-level housing market.
The Section 8 rental assistance program designed to assist low-income renters, would receive additional government funding. According to Biden, 75% of households eligible for Section 8 subsidies have yet to receive any funding under the existing program. The current 4.7 million beneficiaries of the program could potentially increase to 17 million if the provisions are adopted as proposed. Real estate investors can rest assured that the government will take responsibility for paying a portion, if not all of the tenant’s rent obligation.
3. Elimination of 1031 Exchange
Biden’s proposed tax plan would limit the ability to defer capital gains on the sale of real property in a like-kind exchange only to those making less than $400,000 a year. Currently, 1031 exchanges account for 5% of all commercial real estate sales volume and cost the government in excess of $2 billion in lost revenue annually.
However, a recent study sponsored by a coalition of advocacy groups led by the Real Estate Research Consortium, concludes that eliminating 1031 exchanges would disrupt many local property markets, harm both tenants and owners, and small investors. The study claims that this would likely lead to a decrease in commercial real estate prices in many markets, less reinvestment in commercial and residential real estate, a greater use of leverage to finance acquisitions, and an increase in investment holding periods. The net result would be an economic slowdown as it relates to economic activities associated with real estate transactions (e.g. construction, bank lending, mortgage brokers and realtors).