Biden Eyes New Funds For Housing, End Of 1031 Tax Program
In a March 9, 2023, article titled “Biden Eyes New Funds For Housing, End Of 1031 Tax Program,” Law360 reported that President Biden’s budget blueprint for the next fiscal year includes investments to increase affordable housing, “while again seeking to eliminate a tax provision that real estate pros frequently take advantage of as part of their transactions.” McDonald Carano Partner Rob McPeak is quoted in the article regarding the 1031 tax program:
“The proposal’s reappearance in the president’s budget was no surprise, but it is likely to again engender heavy pushback and a serious lobbying effort from the industry,” said Robert E. McPeak, a partner at McDonald Carano in Las Vegas. “A lot of my clients, especially local and regional developers, they really rely on this because it allows them to develop the property, sell it and then they can reinvest the proceeds back into the next project that they’re going to do instead of having to save extra money or retain cash to pay the tax bill,” he said. McPeak estimated that 1031s are involved in about 20% of the work he does, but noted that when they are part of a deal, they are “significant and important to the parties.”
The complete article is provided below.
“Biden Eyes New Funds For Housing, End Of 1031 Tax Program,” Law360, 3/9/2023
With his budget blueprint for the next fiscal year, President Joe Biden pitched Thursday a host of investments to increase low-income Americans’ access to affordable housing, while again seeking to eliminate a tax provision that real estate pros frequently take advantage of as part of their transactions. If enacted, the White House budget for fiscal year 2024, which begins in October, would provide tens of billions of dollars in discretionary and mandatory spending, tax measures and other incentives to boost housing subsidies, aid first-generation homebuyers with their down payments and push localities to reform zoning with the goal of remediating the shortage of affordable homes that is plaguing the nation. The funds and programs would flow primarily through the Department of Housing and Urban Development. According to an estimate from the National Low Income Housing Coalition, HUD would receive just over $73 billion through the “regular appropriations process,” which translates into a “modest” 1.6% increase from the FY23 enacted level. “Major investments” in housing would instead come through mandatory spending, the group said. “[The budget] lowers housing costs by increasing affordable housing supply and expanding access to affordable rent through the Housing Choice Voucher program to well over 200,000 more households,” Shalanda Young, director of the Office of Management and Budget, said during a call with reporters Thursday.
As part of several measures to reduce the budget deficit by “hundreds of billions of dollars” over the next decade, the White House blueprint separately revives Biden’s nearly 2-year-old push to do away with a “sweetheart deal” that allows real estate investors to defer capital gains taxes under Internal Revenue Code Section 1031 on transactions that involve the exchange of real property. The move would save an estimated $19 billion, according to the White House.
“This loophole lets real estate investors — but not investors in any other asset — put off paying tax on profits from deals indefinitely as long as they keep investing in real estate,” the administration noted in a fact sheet Thursday. “This amounts to an indefinite interest-free loan from the government.”
According to Jay Neveloff, chair of real estate at Kramer Levin Naftalis & Frankel LLP in New York, the move would have a “materially adverse” effect on the industry. “To deprive the industry of a tool that it has had for many, many years, it will have a counterproductive effect on the economy: There’ll be more defaults, people will be less likely to trade, they may lose properties — it will have a devastating effect at a time when we want to encourage investment, encourage transactions,” said Neveloff. “I’m hard-pressed to think of a sale agreement that doesn’t at least have a provision that authorizes a 1031 exchange.” This is not Biden’s first go-around at taking aim at 1031s, and it’s too early to tell exactly just how much of a priority it might be for the administration going forward. “I don’t know if the administration is any more serious this year than it has been in the past, but so far at least, Congress has recognized that it would have the absolute opposite effect that I’m sure they want when we are trying not to have a credit crunch,” Neveloff said.
The proposal’s reappearance in the president’s budget was no surprise, but it is likely to again engender “heavy pushback” and a serious lobbying effort from the industry, said Robert E. McPeak, a partner at McDonald Carano in Las Vegas. “A lot of my clients, especially local and regional developers, they really rely on this because it allows them to develop the property, sell it and then they can reinvest the proceeds back into the next project that they’re going to do instead of having to save extra money or retain cash to pay the tax bill,” he said. McPeak estimated that 1031s are involved in about 20% of the work he does, but noted that when they are part of a deal, they are “significant and important to the parties.”
Hello, New Affordable Housing?
Meanwhile, Biden’s housing plans would reserve $32.7 billion for the Housing Choice Voucher program, or $2.4 billion more than the 2023 enacted allocation, to serve currently eligible families and expand the pool by another 50,000. An additional 130,000 households would separately benefit from accessing the program reserves, according to the White House. The budget proposal would also use another combined $22 billion to guarantee housing vouchers for all 20,000 young Americans who age out of foster care each year, gradually providing the benefit to some 450,000 veteran households with extremely low incomes.
According to Sharon Parrott, president of the left-leaning Center on Budget and Policy Priorities, or CBPP, the blueprint lays the groundwork for “some important advances” in tackling the housing crunch. The proposed expansions of the Housing Choice Voucher program through discretionary and mandatory spending, in particular, represent an “important step forward,” she noted. However, Parrott said in a statement Thursday, “substantially more investment will ultimately be needed to help all of the 16 million households paying more than half of their income on rent or experiencing homelessness, housing instability and overcrowding.” Peggy Bailey, vice president for housing and income security at the CBPP, also underscored Biden’s novel approach “to start funding rental assistance and public housing redevelopment outside the normal annual appropriations process.” “Having a place to live isn’t ‘optional’ — it is a necessity,” Bailey told Law360. “The administration is showing that they recognize this by proposing guaranteed resources to help foster youth and veterans with extremely low incomes afford a place to live. This is what everyone needs.”
The White House also aims to deliver $51 billion in total additional funds to the sought-after Low-Income Housing Tax Credit program, a new Neighborhood Homes Tax Credit, and “project-based rental assistance contracts” to bolster the development of housing that is accessible to low-income renters and homeowners alike. According to Benson F. “Buzz” Roberts, president and chief executive of the National Association of Affordable Housing Lenders, or NAAHL, the Neighborhood Homes Tax Credit would help stimulate the development of some 500,000 homes for purchase in distressed neighborhoods. The proposed increase in the LIHTC program would instead help add about 2 million affordable apartments over 10 years above the volume that’s already happening, Roberts said. “Overall, we are very pleased with the budget with respect to affordable housing and community development, particularly with regards to tax credits,” Roberts told Law360. “This budget includes a substantial increase in volume for the Low-Income Housing Tax Credit, which is the most successful affordable housing production program in U.S. history.” Roberts also welcomed the White House proposal to make the New Markets Tax Credit — which incentivizes economic development investment in distressed communities — permanent.
Separately, the White House proposed putting $85 million toward a “competitive program” that would reward states and localities that abandon exclusionary zoning policies or otherwise facilitate the development of affordable housing locally. Another $10 billion in mandatory funding would go “to incentivize the next group of jurisdictions to make similar zoning and land use reforms,” according to the 184-page document. The blueprint further includes $1.8 billion for the HOME Investment Partnerships Program, which represents an increase of some $300 million from this year’s enacted level. According to the HUD website, HOME is “the largest federal block grant to state and local governments designed exclusively to create affordable housing for low-income households” through the construction, purchase and renovation of attainable rental and owner-occupied properties. The White House also envisions directing $258 million toward the creation of 2,200 “new permanently affordable housing” units catering to seniors and people with disabilities, and supporting the rural housing program run by the U.S. Department of Agriculture to the tune of $459 million with an eye toward helping low-income renters and ensuring rural properties’ resilience to climate change. And to close a stubborn racial homeownership gap, the White House separately proposed putting more than $10 billion toward a new First Generation Down Payment Assistance program and a separate down payment assistance pilot program under HOME.
“The budget invests in Americans at every station in life — from those seeking to purchase a home to those who receive HUD rental assistance — and will ensure families across the country can live in communities that are safe, affordable and resilient,” said HUD Secretary Marcia L. Fudge in a statement. The budget proposal is typically just an opening bid ahead of tough negotiations with Congress over actual future government spending and a vehicle for the president to outline his policy priorities. This is slated to be a particularly uphill battle for the White House given that Republicans control the House of Representatives. “This is the start of a healthy dialogue … when you look at this president’s view of the world and what this budget puts forward, it shows you what he values … we are happy to have that debate with anybody,” said the OMB’s Young during the press call Thursday. “So, absolutely, we will see tax policies here that say to the richest Americans and large corporations … that you have to begin to pay your fair share. And that way we can continue to invest in working families in this country … all while being fiscally responsible,” she added.
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