This month’s National Association of REALTORS® (NAR) Power Broker Roundtable explores how the Biden Administration is impacting the real estate industry.
Cindy Ariosa, senior vice president, regional manager, Long & Foster Real Estate, Chantilly, Virginia; liaison for large firms and industry relations, the National Association of REALTORS® (NAR): For a variety of reasons, the coronavirus pandemic put vast numbers of Americans on the move. March 2021 existing-home sales were up more than 12% compared with March 2020. How long the upward trajectory will last is debatable. But one thing is certain: REALTORS® are fiercely alert to any legislative changes that could impact the industry. Six months into the Biden administration, we’re exploring a few of the issues that matter most to individuals and investors. High on the list is the 1031 exchange, so let’s start with that.
Shannon McGahn, chief advocacy officer, NAR, Washington, D.C.: The 1031 exchange allows investors to defer paying capital gains on the sale of a property if the proceeds are reinvested in another similar property. It has been part of the IRS code since 1921, and for decades, it has brought immeasurable revenue, jobs, investment and economic benefit to the U.S. President Biden’s plan would limit the tax deferral to transactions less than $500,000, and if wealthier investors choose not to sell, it could temporarily keep properties off the market. It’s important to remember that it’s a deferral, not a tax cut or loophole, and when we educate lawmakers on its impact on real estate and community development, they understand its importance very quickly.
Chris Trapani, co-founder/CEO, Sereno Real Estate, Los Gatos, California: Historically, more restrictive and excessive taxes on real estate disincentivize people from selling, which contributes to the lower inventory condition. Lower inventory then adds pressure, causing values to rise, thereby negatively impacting affordability. The 250K/500K exclusion for primary residences, which replaced the rollover of any level of gain provided a primary residence of equal or greater value was purchased within two years rule in 1997, is a perfect example. In the Bay Area, any owner looking at profits exceeding $250,000 for singles and $500,000 for couples is disincentivized to sell, which has contributed to the problem of low inventory and lack of affordability overall. Therefore, if the 1031 exchange goes away, fewer people would sell, and we’d have even less available properties for sale.
Jon Coile, vice president, MLS and Industry Relations, HomeServices of America, Annapolis, Maryland: There have been rumors for decades about the demise of the 1031 exchange, but there’s too much resistance for that to happen. Yes, it helps the affluent, but there are plenty of average people out there who own a couple of rental properties or maybe a little strip mall, and it helps them, too. In any case, coming out of COVID may not be the best time for a lot of investors to change where their money is invested. I don’t see much happening on this until after the pandemic is over.
CA: And the larger issue of capital gains?
JC: If you learn from history, you know that everything is doomed to repeat. In past years, when the capital gains tax went from 20% to nearly double that, there was little impact on any but the richest Americans. Today, we again have a 20% rate, which Biden proposes to double. But once again, there will be little or no impact on anyone earning less than $1 million a year—and only 0.03% of Americans earn that much.
CT: The administration has repeatedly said that the president does not intend to raise taxes on anyone earning less than $400,000 a year, and this capital gains tax plan kicking in at $1 million seems to honor that.
SM: If you double the capital gains tax for sellers, the wealthiest can afford to wait. We educate lawmakers as to the fact that raising the capital gains tax could actually reduce revenue, not bring more in.
CA: What about the first-time homebuyer credit?
SM: Biden’s call to provide a $15,000 tax credit for first-time homebuyers, or up to 10% of the purchase price, is now a bill in Congress that would clearly incentivize more millennials and minorities to jump into the market. In addition to increasing affordability, it could help increase inventory if new tax incentives encourage investors to convert unused commercial properties into residential.
CT: Any time supply is suppressed, values appreciate faster, which we are seeing today—and which prices people out of the market. This tax credit will increase affordability. It’s a great solution for leveling the playing field for buyers.
JC: We are excited about it because it’s cash that turns up on the settlement table to make the home purchase possible. Buying a house is the single biggest investment for most people, and we are in the enviable position of helping them get into the homes that will help them build a nest egg. What I love about Biden’s goal is that increasing affordability extends the opportunity to build wealth for so many more people, especially the underserved—and we can help make it happen. What a noble profession we are in.
The Power Broker Roundtable is brought to you by NAR and Cindy Ariosa, NAR’s liaison for Large Firms & Industry Relations. Watch for this column each month, where we address broker issues, concerns and milestones.
For more information, please visit www.nar.realtor.