As the election approaches, multifamily real estate investors are keeping an eye on potential shifts in tax policy. The tax plans of Kamala Harris and Donald Trump differ significantly and could affect areas like capital gains, 1031 exchanges, and depreciation rules.
In this post, we compare their tax policies, explore their past impacts on real estate, and consider what they could mean for multifamily investors in the future.
Kamala Harris’ Tax Policies
Kamala Harris supports tax policies aimed at increasing taxes for higher-income individuals and corporations, aligning with the Biden administration’s fiscal goals.
Capital Gains Taxes
Harris backs the Biden administration’s proposal to raise capital gains taxes for individuals earning over $1 million. Under this proposal, long-term capital gains would be taxed at the same rate as ordinary income, up to 39.6% for high earners.
1031 Exchange Reform
The Biden administration has also proposed limiting 1031 exchanges to gains under $500,000, which Harris supports. This could impact large, high-value real estate transactions.
Affordable Housing and Tenant Protections
Throughout her career, Harris has pushed for affordable housing initiatives. As a senator, she introduced the Rent Relief Act, aiming to provide financial relief to renters facing rising costs.
Donald Trump’s Tax Policies
Donald Trump’s tax policies, particularly through the 2017 Tax Cuts and Jobs Act (TCJA), focused on reducing taxes across the board, benefiting real estate investors.
Capital Gains Taxes
The TCJA maintained a top capital gains tax rate of 20%, which helped encourage property sales and reinvestment. This lower tax rate was key in maintaining liquidity in the real estate market.
1031 Exchange Support
Trump’s administration upheld 1031 exchange rules, allowing investors to defer capital gains taxes by reinvesting in like-kind properties. This was beneficial for expanding real estate portfolios.
Depreciation Benefits
The TCJA also introduced 100% bonus depreciation, which allowed investors to deduct the full cost of eligible property improvements in the first year. This generated significant tax savings and improved cash flow for multifamily investors.
Past Impacts on Real Estate
Under Trump: The 2017 Tax Cuts and Jobs Act had a major positive impact on real estate, particularly multifamily properties. The preservation of key tax benefits like the 1031 exchange and the introduction of bonus depreciation encouraged property transactions and spurred investment. This led to increased investment activity, as reported by the National Association of Realtors.
Under Harris/Biden: Proposed reforms, such as higher capital gains taxes and limitations on 1031 exchanges, have created uncertainty among real estate investors. These changes could potentially slow down transaction volume, as noted by the Tax Policy Center.
Future Impacts on Multifamily Investments
If Harris’ Policies Are Enacted: Investors could face higher taxes on property sales and be limited in their ability to defer capital gains through 1031 exchanges. This might lead to a focus on generating long-term cash flow from rental income rather than relying on capital gains from sales.
If Trump’s Policies Return: A return to Trump’s tax policies would likely preserve the favorable conditions for real estate investors. Maintaining lower capital gains tax rates and the 1031 exchange would continue to encourage property sales and reinvestment, boosting liquidity in the market.
Conclusion
The upcoming election could have notable implications for the multifamily real estate sector. Kamala Harris’ proposed tax policies may lead to increased taxes on real estate transactions and limit the use of 1031 exchanges, which could affect investors' decisions about buying and selling properties. On the other hand, if Donald Trump’s tax policies were reinstated, they could continue to provide tax incentives that promote real estate transactions and reinvestment.
Both approaches have potential benefits and challenges for investors, and the outcome of the election will shape the landscape for multifamily investing in different ways.
Sources:
whitehouse.gov
taxpolicycenter.org
harris.senate.gov
crsreports.congress.gov
irs.gov
nar.realtor
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