Lew Sichelman

Over the next few months, the White House is likely to propose two major tax changes that could impact the housing sector. 

One, a tax credit for first-time buyers, is likely to be welcomed by those who have yet to get a toehold on the housing ladder. But it is totally unnecessary, at least right now. The other, abolishing a little-known tax benefit accorded to investors, could upset the real estate continuum up and down the line. 

Giving a tax credit to renters who want to buy their first houses is a noble, but not a new, idea. It was first offered in the 1970s to jump-start the slumbering new-home sector, and it was resurrected during the Bush and Obama administrations to help pull housing out of the Great Recession of 2008. 

In the ’70s, the tax credit was $2,000, which looks like chicken feed compared to the $15,000 credit President Joe Biden has talked about. But “it worked like gangbusters,” David Seiders, the former chief economist at the National Association of Home Builders, has been quoted as saying. 

In 2008, President George W. Bush brought back the credit to help raise the country out of the Great Recession, which was caused largely by overzealous lenders granting loans to unqualified borrowers. In 08, the tax credit was a maximum of $7,500. But in the subsequent two years, President Barack Obama raised it to $8,000.  

According to the Center for Economic and Policy Research, the credit did help to initially boost home sales and prices, as it was intended, though modestly. Now, President Biden is said to be considering asking Congress to clear another first-time buyer credit. 

Buyer Tax Credit Not Needed 

With $15,000 in hand, research from Zillow said, 9.3 million renters – nearly 1 in 3 – would have enough cash to cover their entire down payments on a median-priced home in 40 of the country’s 50 largest metropolitan areas.  

But here’s the problem: The last thing the market needs is more would-be buyers. 

People are already falling all over themselves and one-upping each other to win the few houses on the market. According to a recent CNN report, a run-of-the-mill fixer-upper in Silver Spring, Maryland, just outside Washington, D.C., drew 88 offers – 76 all-cash, and 15 sight-unseen. Listed at $275,000, it sold for $460,000. 

As of the end of March, according to realty data firm Altos Research, the inventory of unsold houses nationally stood at 313,000. That’s 58 percent fewer houses than the 747,000 on the market the same time last year. 

So, no – housing does not need a tax credit for first-timers; rather, it needs more houses for sale. Maybe a tax break for owners to persuade them that now’s the time to sell is in order, instead. One idea floating around is to suspend or reduce capital gains taxes for anyone selling during a specific time period. 

Maybe that would provide an additional incentive for the large percentage of owners who told Zillow researchers recently that they are not interested in selling, many because they are worried about finding or affording a replacement house. 

Nix Nixing 1031 Exchanges 

Biden should also shelve his proposal to eliminate Section 1031 like-kind exchanges, which allow property owners to defer taxes on the disposal of one property by replacing it with another. This, too, has been run up the flagpole by previous administrations as a way to generate more revenue, but it has never received much traction. 

Most people have no clue about Section 1031, but the 100-year-old rule is a key tax benefit in the real estate community. It mostly impacts the commercial sector, but it is claimed in the residential field, as well. Local community governments and nonprofit organizations also use like-kind exchanges to conserve land for the public benefit. 

Like-kind exchanges are particularly important in land development and multifamily housing: two investments which are highly illiquid. By taking advantage of the rule, builders and developers can rebalance their portfolios without having to generate enough cash to pay taxes. Without the benefit, experts say, many of these properties would languish, remaining underutilized. 

Biden has called for Section 1031’s repeal for taxpayers with incomes above $400,000. I’m all for making everyone pay their fair share. But it’s not as if investors use the provision to skirt capital gains taxes altogether. Rather, when the proceeds of a sale are directed into a new property within 180 days, the tax on the exchange is deferred, not forgiven. 

The tax eventually comes due when the profits from the last trade are finally pocketed. 

According to a 2015 study by two college professors, David Ling from the University of Florida and Milena Petrova of Syracuse University, nearly 88 percent of exchanges end in taxable sales, yielding more taxable gains than properties bought and sold through regular taxable sales. 

Realty interests maintain the exchange rules are among the most important of all tax provisions for investors and real estate professionals. Recently, in a rare show of unity, more than 30 realty organizations – including heavyweights like the National Association of Realtors, the National Association of Home Builders and the Mortgage Bankers Association – sent letters to key congressional committees and the Treasury Department outlining how Section 1031 benefits the marketplace. 

“Like-kind exchanges allow investments to be shifted to the most productive and efficient uses,” said NAR President Charlie Oppler. Without it, the ripple effect would impact realty brokers and agents, title companies, appraisers, inspectors and everyone else along the real estate chain. 

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com. 

Biden Should Pocket These Tax Ideas

by Lew Sichelman time to read: 4 min