On Thursday, the Biden administration released its $6.9 trillion budget proposal for next year thatd cut deficits by nearly $3 trillion over the next ten years via tax increases.
In the budget, the administration claims that closing tax loopholes that overwhelmingly benefit the rich and the largest, most profitable corporations, will save billions of dollars. With that, President Joe Biden proposed to close the so-called like-kind exchange loophole, as his administration refers to it, arguing that it lets real estate investors defer tax indefinitely. But its not the first time Bidens proposed to close the like-kind exchange benefit, and its unlikely that itll be included once Congress approves spending levels.
The like-kind exchange, or 1031 exchange, basically allows real estate investors to sell their property and acquire another and defer any capital gains taxes from that initial sale. Referring to it as a special tax subsidy, the White House wrote: This loophole lets real estate investors put off paying tax on profits from real estate deals indefinitely as long as they keep investing in real estate. This amounts to an indefinite interest free loan from the government. Real estate is the only asset that gets this sweetheart deal.
University of Southern California professor of public policy and director of the Homelessness Policy Research Institute, Gary Painter, told Fortune its likely that Biden is attempting to show that people who have rental properties as investments ought not to be treated differently than people who are owner occupiers of their homes, as notion of tax fairness, so to speak.
If the rules regarding how easily it is to move from one investment property to another change, you might just see fewer of those exchanges because investors wont want to pay capital gains multiple times, Painter said. Not to mention that changing the law could make it more difficult to obtain financing because profit is essentially being reduced, which changes the value of properties like multifamily buildings. Painter later added that closing the 1031 exchange doesnt seem like the right thing to do right now, and there are other opportunities for the government to close loopholes that dont potentially impact the building of multifamily housing.
Senator Elizabeth Warren, on Thursday after the budgets release, tweeted: Real estate investors, including giant corporate landlords, bought up 1/4 of all single-family homes sold in 2021, often exploiting tax breaks. The way I see it, taxpayer money on housing needs to go towards addressing the affordability crisisnot enriching Wall Street, seemingly approving Bidens proposal.
The Biden administration claims that in eliminating this tax subsidy for real estate, it saves $19 billion. What the money will go to however, is not mentioned. But, in a separate entity of the budget, the administration proposes to invest more than $175 billion on housingwith plans to invest in building and preserving millions of affordable homes, while reducing barriers to housing production; committing to housing accessibility and affordability for youth aging out of foster care and veterans; investing in first-time, first-generation homebuyers by providing down payment assistance; and funding to build on the Biden Administrations unprecedented eviction prevention, diversion, and rent relief programs and advancing efforts to end homelessness.
Painter said if he had to predict, this wouldnt survive the Republican-led House, which is reportedly considering making cuts to housing programs in their own budget expected later this spring, according to the New York Times.
Just around thirty minutes after Biden and his administration unveiled next years proposed budget, House Speaker Kevin McCarthy tweeted, President Biden just delivered his budget to Congress, and it is completely unserious. He proposes trillions in new taxes that you and your family will pay directly or through higher costs. Mr. President: Washington has a spending problem, NOT a revenue problem, which garnered a retweet from the House GOP account.
In the Times report, published ahead of Bidens budget release, the publication claims that some House Republicans are developing their own budget that heavily relies on a budget outline created by Russell Vought (the former Trump administration budget director.)
The budget outline includes a 43% cut to housing programs, which includes phasing out Section 8, among other proposed cuts, according to the Times. Vought told the Times that his strategy uses spending cuts against the woke and weaponized government. But cutting housing programs by a bit less than half, and phasing out Section 8 (which uses housing vouchers to financially assist low-income people with their monthly rent), would be devastating, Painter said, adding that homelessness and housing insecurity would rise dramatically.
I have a feeling that in both cases, these are just things that both parties know wont pass, Painter told Fortune, but its a way to signal their commitment to their constituents. In Bidens case, hes showing that real estate investors should be treated the same as people who own their own homes, signaling a commitment to fairness, Painter said. Republicans, if their proposal includes housing program cuts, are fulfilling their promise to cut all kinds of social safety net programs.
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