Republican or Democrat and The Impact to Real Estate

by Christopher Levarek

“An election is coming. Universal peace is declared, and the foxes have a sincere interest in prolonging the lives of the poultry.”

- George Eliot

November 3rd, 2020 is the United States Presidential election. Two candidates have emerged with president Donald Trump representing the Republican party and Joe Biden representing the Democratic party. The decision of the election will sway the country’s politics for the next four years and ultimately affect many industries, businesses and people.

I wanted to discuss some key points for either party and how these could affect positions in real estate or investing overall. I do not aim to guide or encourage the vote of either candidate, however simply pull back the covers as to why one might be inclined one way or another based on their position in business or in real estate. Mostly we will look at the effects on real estate or the new or current business investor/owner. Let’s jump in!

A vote for Joe Biden, Democratic Candidate

Biden Plan - Tax Increase

The democratic party, or Joe Biden has proposed a plan for his term called the “Biden Plan”. This suggested tax plan has a few items which will hold a drastic change for those meeting the category. At a high level, people earning more than $400,000 a year could pay combined federal and state income taxes at a rate of more than 62%, according to a CNBC article.

This high would be felt mostly for those meeting this category in states such as California, New Jersey and New York, see our previous blog on how this is affecting migration from these states.

Each state would vary however a tax rate of 49.6% would be roughly a new normal for those meeting this category. Specifically this would affect small business owners, seniors and higher income earning families.

Biden Plan - 1031 Exchange

One of the present tax incentives for investing into real estate includes a benefit called the “1031 exchange”. This basically allows an investor to sell a property and roll the gains into another acquisition or property of like kind. By doing this, the gains are not taxable at that moment in time. Eventually those gains will be taxed when the next property is sold for example, however this exchange allows for this transfer to occur and defer the taxes for the moment.

Under Joe Biden, this benefit has been proposed to be removed. This would most likely cause many real estate investors to no longer sell their properties as easily to avoid taxable gains. In the long run, this means less investors purchasing properties and less renovation of those newly purchased properties. All in all, a significant loss to the real estate market and drastic effects on the real estate turnover or acquisitions leading to less investment into real estate in general.

The new Stimulus plan

Many are familiar with the discussions at present to pass another act similar to the “Cares Act” which provided government distributions to all citizens in the United States in the amount of $2.2 trillion dollars. The democratic proposal included a new act called “The Heroes Act”, which proposed an additional $3.4 trillion dollars in additional relief funds for businesses and citizens. This differs from the Republican version, “the Heals Act”, which was no more than $1 trillion dollars.

As of now, negotiations are still under way, however in summary the Democratic version of this bill will most likely be in a greater sum than the Republican version. The funds will be “printed” or created and then introduced into the market thus increasing the amount of dollars in the market and lowering the overall value of the dollar, what is called inflation. This basically decreases the buying power of the consumer with today’s dollar and in itself represents a tax on the American citizen as they end up paying for the act in the long run.

In summary, a vote for Biden would represent a greater increase in the “printing” of the dollar, a increase in inflation and bigger tax on the American people as they will pay for these funds in the long run.

A vote for Donald Trump, Republican Candidate

The new Stimulus plan

The Republican side of the new stimulus plan includes at present a 1.8 trillion offer to Democrats, up from the original suggested $1 trillion. This is still under negotiation at time of this writing. If the Republicans can win the election, it can be generally assumed that this stimulus amount will continue to be lowered until a mutual understanding is reached.

In summary, the Republican version typically represents less money being printed and in consequence a lower impact on inflation or tax on the American people to fund this printing of currency. In either case, the new stimulus bill will effect the United States economy and the value of the dollar, however the Republican version would be simply less.

Opportunity Zones

This program, introduced by the Tax Cuts and Jobs Act of 2017, offers capital-gains tax breaks to developers or real estate investors in over 8,700 areas needing revitalization throughout the United States. By investing in certain areas, investors can defer taxable gains for 7+ years while restoring and adding value to the community. It provided an incentive to enter lower-income or value-add properties and bring back the communities to past glories.

Biden has indicated that he would reform the program. The upcoming changes will again influence real estate investments into these areas and turn some capital or investors away as the benefit decreases due to implied changes. Trump will be leaving the program as is.

Property Taxes

A $10,000 cap on deductions of state and local taxes, also known as SALT, with regards to to real estate property is of concern with the election, introduced originally with the Tax Cuts and Jobs Act of 2017. Basically, this deduction permits taxpayers to itemize state/local taxes when filing federal taxes and the act put a cap on the amount of the deduction.

Property owners in states like New York, New Jersey and California with high state and local taxes would benefit from this cap increased and thus encourage further property purchases or migration to those states.

As it were, Biden is looking to increase the cap or remove the limit altogether. Interestingly enough, “If the law hadn't changed and no $10,000 limit had been imposed, the Bidens would have been able to deduct the entire $361,966 they paid in state and local taxes in 2018. Effectively, the SALT cap reduced the Biden's tax deductions by nearly $352,000.” says the Motley Fool.

Trump has vetoed any further modifications to the cap although talks are on the table still.

The Cares Act

We wanted to call special attention to the Cares Act. This act passed in early 2020, provided the stimulus benefits aforementioned however there were a number of other tax advantages and business benefits provided within. As real estate investors, this one gets special attention as it was passed through by the Senate, then modified/approved by House of Representatives and then signed in by President Trump.

It should be fairly clear that some additional advantages to real estate and businesses were added and approved by the president or Republican party. It should also indicate that a Trump administration would likely continue to add additional advantages in a new Stimulus package if able to do so.

Let’s look at some of the recently added benefits for investors and business owners that came with the Cares Act :

Suspension of the 80% taxable income limitation
Temporary reinstatement of NOL carrybacks
Removal of Early Retirement Plan Distribution Penalty for COVID-19 Related Payments – CARES Act Section 2202
Bonus depreciation technical correction for qualified improvement property – CARES Act Section 2307

We invite the reader to either read our blog on investing opportunities with the Cares Act or this post by Hodgson Russ LLP which lists the recent CARES act business advantages in detail.

In Final

In this post, we addressed a few key items that could be in swing between a Republican or Democratic candidate. Please note that we only discuss business or real estate investing topics at stake in this election. We highly recommend the reader also research other topics of importance as well before casting their vote. With all that is at stake, this is an amazing time to have a say in the future of the economy and the United States as a whole. As always, Invest Smart!