When President Joe Biden introduced the American Families Plan, it included a host of other programs, including universal preschool, free community college, and national paid parental leave. One of the questions surrounding this proposed Plan includes a natural question about the requisite tax changes that have been proposed to pay for the Plan, which currently has a price tag of roughly $1.8 trillion. While none of the proposed changes have been approved or instated, the ‘if yes, what then?’ question is particularly interesting for the commercial real estate sector as a whole.
An Overview of Section 1031
Biden’s new economic plan, if executed in the way the administration has proposed, would include the abolishment of a real estate investor’s ability to defer that capital gain tax. This comes as part of an effort to raise taxes on wealthier individuals to bring the plan to fruition. But since like-kind exchanges are such a popular investment strategy, the changes would hit all types of real estate investors, from large commercial real estate investors down to smaller-scale, highly involved landlords.
In their May blog post, UBS touches on this point briefly, mentioning that the 1031 exchange has been part of the commercial industry landscape for a long time, and that its elimination could lead to a significant decrease in transaction volumes and price discovery, a negative outcome for the commercial real estate industry.
The Biden administration also proposed an increase to the top personal bracket, up 2.6%, and an increase to the dividends tax rate for households making more than seven figures. They mention changes to the tax rate on carried interest, inherited assets, and the amount of tax on earnings that goes toward Medicare for households above an income threshold.