Proposed Tax Law Changes Could Change Shape of Transactions, Real Estate Executives Say

The White House’s plan to raise the capital gains tax rate and do away with deferred taxes on property exchanges, should it become law, would likely result in transactional changes next year and beyond, but any significant decline in the volume of deals may be muted, according to real estate executives and analysts.

In the short term, the proposals by the Biden administration as part of its American Families Plan are expected to generate a surge in real estate deals later this year as investors race to beat the timing of any potential tax increases.

However, determining the longer-term effect that could arise won’t be possible until the ink dries on the fine print. And Washington is a long way from getting to that point.

A coalition of real estate groups has come out against the Biden plan. The industry’s initial guesses are that it could, in time, slightly reduce sales transaction volume, and pricing could increase borrowing costs and hold times. However, brokerage firms say most deals are likely to still move forward.

The most prominent proposed tax changes include raising the capital gains rate from 20% to 39.6%. In addition, the White House plan would remove the ability to shield capital gains above $500,000 from taxes. Such moves are called like-kind or 1031exchanges, referring to Section 1031 of the IRS tax code that has been in place since 1921.

“While 1031 exchanges play an important role in Marcus & Millichap’s business, many of our predominantly private investor client base would need to transact even with restricted tax deferred exchanges,” according to John Chang, senior vice president and national director of research services at real estate firm Marcus & Millichap in an analysis emailed to CoStar News. “Investors generally fall into two categories: owners who ‘must’ sell a property and owners who ‘desire’ to sell a property. The ‘must’ sell investors will transact regardless of the rules on 1031 exchanges."