In a letter to Treasury Secretary Janet Yellen, the National Association of Realtors® thanked the Administration for efforts to lead the nation on a path to economic recovery after the COVID-19 health pandemic and also for recent proposals to address our nation’s long-standing infrastructure and transportation challenges.
NAR went on to oppose recent proposals that weaken the commercial real estate sector, which has been hit hard by the effects of the on-going health pandemic. These provisions are included in the American Families Plan, released last week. Especially troublesome are the proposed limitation on the use of like-kind exchanges, the increase in the capital gains tax rate and what appears to be a proposal to tax unrealized capital gains at death for owners of properties with assets over certain levels, all of which would negatively impact the health of the commercial real estate market and could also negatively impact affordable rental housing.
Each position is detailed below. For more information on NAR’s advocacy efforts, visit the Washington Report policy blog, covering legislative and regulatory policy activities from NAR’s Advocacy Group: www.nar.realtor/washington-report.
Limitation to 1031 Like-Kind Exchanges
By allowing property owners to defer capital gains when one property is exchanged for another, like-kind exchanges help get real estate into the hands of new owners with the time, resources, and desire to restore and improve them. Like-kind exchanges increase the supply of affordable rental housing by filling gaps in housing supply not covered by other incentives. Like-kind exchanges will accelerate our economic recovery from the pandemic by preventing real properties from languishing, underutilized and underinvested. While a $500,000 limitation of deferred gain may allow a large number of smaller exchanges to still go forward, the larger trades that exceed this cap provide the greatest potential for job creation and economic growth. Cutting them off, particularly at this critical time, seems short-sighted.
Capital Gains Tax Rate Increases
Lower capital gains tax rates reflect an incentive to invest capital, which increases economic growth and creates jobs. Selling of capital assets is usually voluntary and imposing a much higher, almost punitive rate on such gains will limit such sales and could have the effect of freezing portions of the market, resulting in lower growth and far fewer jobs. High capital gains taxes on real property will also negatively impact the after-tax return of larger real estate investment projects, meaning that fewer will move forward, again reducing growth and jobs. It could also have the effect of lowering property values of all existing properties, not just properties owned by those facing the higher rates. Moreover, the proposal could also sweep in those whose normal levels of income are far below the threshold, since selling a property in one year could catapult the seller’s income above the threshold and nearly double their capital gains tax rate.
Taxing Unrealized Capital Gains at Death
While the American Families Plan fact sheet refers to the “step-up” basis issue as the target of this change, the description indicates that this proposal would instead tax owners of capital assets above a certain level upon their death. Such a change would penalize many hardworking and enterprising Americans who have spent their lives saving and building equity in their properties and businesses so they can provide security for themselves, their families, their employees and others. The proposal indicates there would be protections for certain enterprises where heirs continue to run the business, but outside these narrow confines, many decedents' estates will likely have to sell property in order to pay the tax. Such a change disrupts lives, harms growth, and flies in the face of principles that have guided tax policy in America for more than a century.