Biden’s “America Families Plan” Has Implications for Apartment Owners

Last evening, President Joe Biden spoke to a joint session of Congress where he focused on so-called “Big Picture” items he is seeking to accomplish for this year. A central piece of this is his proposed “American Families Plan,” which includes among other things, universal preschool; two-years of free community college; Federal support for childcare; national paid family and medical leave and many other proposals. The plan would be accompanied by both tax reductions and tax increases.

In the latter category, high-income earners and increased enforcement are central focuses, however, there are a number of other tax provisions of specific concern to those of us in the apartment industry, such as:

• Higher Individual Tax Rates: proposal to increase to 39.6% the top tax rate for ordinary income.
• Higher Capital Gains Tax Rates: proposal to increase the capital gains tax rate to 39.6% for those making over $1.0 million.
• 1031 Exchange Limits: Section 1031 “Like-kind Exchanges” proposed to limit the tax deferral amount to a maximum of $500,000.
• Inherited Property: Proposal would eliminate “stepped-up basis” for individual gains over $1.0 million ($2.5 million per couple) and tax the gains. (Family-owned businesses would receive some protection if the heirs to the business continue to operate it.)
• Carried Interest: Carried interest would be taxed as ordinary income. Carried interest is a share of a private equity or fund’s profits that serve as compensation for fund managers. Traditionally a tax “loophole,” because carried interest is considered a return on investment, it has been taxed at a capital gains rate, and not the ordinary income rate.
• Pass-thru Loss Deductibility: Active pass-through business losses, including losses generated by real estate professionals, would be restricted by making permanent Section 461(l) that restricts the deductibility of active pass-through business losses to $250,000 for individuals and $500,000 for joint filers.

These are some of the highest impact provisions for real estate professionals, but there are others. One piece of good news is that the 20% deduction for pass-through business income created under Section 199A in the 2017 Tax Cuts and Jobs Act was untouched by President Biden’s proposal.

The Apartment Association of Greater Los Angeles is providing support to its national affiliate, the National Apartment Association, which is already working with other interested real estate advocates to analyze this proposed plan and to create an advocacy strategy going forward.

At this level of tax increase, it seems unlikely that any bipartisan compromise will be reached and accordingly, budget reconciliation will have to be the method by which this package, in whatever form it takes, is ultimately passed. That means moderate Democrats in the Senate and House of Representatives will be critical to our industry’s efforts.

There are already signs that the Democratic caucus is not entirely in lockstep over these proposals so this may be the most extreme point from which the negotiations move back. It will be very important for members to share with our representatives within the National Apartment Association the impacts of these proposals so that we can communicate this to Capitol Hill. Stay tuned for more on that.

As always, we will continue to keep you apprised as the situation develops and presents itself.