DEEDED INTEREST
The “Biden Effect” and other terrifying predictions
The Aspen Times | Published on February 28, 2021 | View the original article here →
I was on the phone with an older client last month to talk over a deal we’d been working on and casually asked how he and his wife were doing. In this age of COVID I ask everyone, but particularly those over 65 as they are higher risk, and these days, either have received the vaccine or are anxiously awaiting to get both doses in their arm. Both my Mom and mother-in-law are in their mid-70s and are relieved and excited to finally have it on board. They’re both making plans to get out and about, travel and see their grandkids.
His answer blew me away. He and his wife weren’t getting it. Hadn’t I heard about Hank Aaron? Didn’t I know this whole thing was conjured up by the government to get us lined up and chipped? I had certainly been aware of the proliferation of unfounded, non-factual information regarding both the virus, the vaccine and the recent election. But this was the first time I’d been up close and personal with someone with such extreme beliefs. There wasn’t much I could say or do. This was a business relationship rather than a friend or relative. Besides, it was clearly this man’s opinion; that of an educated, responsible, and accomplished one at that.
In hindsight, I really should not have been surprised. The battle over truth and lies, facts and conspiracies, insurgent vs. patriot, red and blue, black and white, him and her or it, continues to simmer, even after Biden assumed the Presidency. And as I discovered with my client and his views on the pandemic and the cure, this debate and divide is now having an impact in my daily work and within the world of real estate.
Case in point, recent references by clients to what’s been dubbed “The Biden Effect”. Yes, I googled it. To be fair, any new administration or shift in political policy is going to have an impact on the bottom line. Taxes and take home are the stuff on which elections are won and lost. So I thought it might be valuable to take the time to review some of the proposals that could have an impact on the residential and commercial real estate markets. Those changes are typically manifested in new tax code.
The new president’s plan targets those who make over $400,000 a year. For that portion of earners Biden has floated raising the marginal tax rate from 37% to 39.6%. The corporate tax rate would go from 21% to 28%. And likely of most concern to those who buy, sell and own real estate, taxing long-term capital gains and qualified dividends at 39.6% on income over $1M. There’s also been speculation over the future of tax deferment options like 1031 exchanges.
These changes, should they come to fruition are not insignificant. They would have real impacts on the pocketbook. 1031 exchanges account for 6% of all commercial real estate deals and cost the government $2 billion to $4 billion in lost revenue per year, a huge sum of money this new administration might like to use for other programs.
Most experts point out the likelihood of seeing these changes occur in the next year are slim to none. After all, we’re fighting a world-wide pandemic. But pandemics and enacting new policy cost money, so reform is sure to come. In regards to 1031s, I personally can’t imagine Congress, who’s median age is just shy of 60 years of age who own more than their fair share of stocks and real estate, will allow that particular and oft-used tax shelter to be dismantled.
There are also portions of the plan that could provide a boost to first-time home buyers. Under this provision, customers would see cash at the closing table rather than a credit at tax time. The proposal calls for as much as $15,000 to help purchase a property. In a time when down payments are tough are getting tougher, a plan like this could incentivize new buyers, and eliminate the need for new homeowners to deplete all their resources.
If any of this does come to pass, will it have any effect on our red-hot market? I doubt it. Accordingly to new numbers released by the National Association of Realtors, nearly 9 million people relocated since lockdown was lifted. Most moved during the summer months. One in three adults shifted from a daily commute to remote work. The threat of higher taxes and even an uncertain economy is not stopping this historic migration. There are larger forces at play.
As we warm up into spring and more folks get their shots, I expect an even busier summer here in the valley than last year in terms of tourists and interested buyers.
The big questions are: Will there be anything left to sell? Are there still opportunities to find here? More on that next month!