Even so, President Joe Biden’s administration is proposing a change in the federal tax code that could severely limit the likelihood that such housing will get built.
As part of its proposal to spend some $3.5 trillion on social programs and industrial programs and another $500 billion on infrastructure, the Biden administration is proposing a number of ideas it thinks will increase tax revenue, including raising the corporate tax rate from 22 percent to 28 percent.
One such tax proposal would affect the cost of capital for real estate investors by changing how they defer capital gains.
Following basic economic laws of supply and demand, an increased cost to anything will lead to fewer of those things being supplied, which would likely cause abnormally higher rents.
In this case, the Biden administration wants to change how much tax can be deferred when a property owner sells one property and buys another.
Currently, such a property investor can elect to do a 1031 Exchange, which allows them to use all sale proceeds of the first property to buy a second property, without having to pay capital gains on the initial property until the investor sells the subsequent property for cash.
The process of doing 1031 exchanges substantially reduces the cost of capital for property investors.
According to the National Association of Realtors, 40 percent of all such transactions involve multi-family homes.
Capital gains refer to the increased value of an asset from the date of purchase, after making adjustments for depreciation and other expenses. Capital gains taxes are paid on such sales when the asset is held longer than a year.
That would be terrible for people struggling with homelessness.
The National Association of Realtors website quotes Norman Alexander, president of the Ridgecrest Area Realtor Association and a member of the California Association of Black Real Estate Professionals.
Said Alexander: “As the Black community explores avenues for growth of their financial opportunities… the 1031 like-kind exchange [as it is] is more important now than ever.”
Any legislation carries the risk of unintended consequences.
In California, any change to the tax code trying to increase taxes from property owners could lead to higher rents and exacerbate the state’s housing crisis.