With the election approaching, RSM is looking at the economic stakes and the key issues for various industries. This is the first in our series of industry-focused election previews.

The top policy issue for real estate is: Potentially significant changes to tax policy lie ahead. The tax benefits of investing in real estate have always been an especially attractive trait. Both candidates have provided glimpses into their tax plans, and the impact to real estate is front and center. Whether you own a small rental property or run a private equity fund with a diverse real estate portfolio, how you choose to operate your property and how long you hold your asset may be affected. In addition, the cap on the state and local tax, or SALT, deduction that hurt homeowners in high-tax states may be reevaluated.

If Trump wins: Expect more status quo and some additional breaks. Many provisions of the 2017 Tax Cuts and Jobs Act, which is set to expire in 2025, could be permanently extended, including the section 199A deduction. As many properties are owned through pass-through entities, the section 199A provision has been favorable to real estate investments. The program that offered development incentives through the creation of Opportunity Zones in underprivileged areas could also be expanded. Furthermore, President Trump has also suggested lowering the maximum tax rate on capital gains to 15% from 20%. All of this will likely spur transaction activity and provide favorable tax situations for the industry.

If Biden wins: Long-term capital gains, currently taxed at 20%, would be taxed at ordinary income rates, which will hurt after-tax returns on real estate, almost always considered a long-term investment. Furthermore, tax rates will go up for corporations (from 21% to 28%) and high net worth individuals (from 37% to 39.6%). He has also proposed the removal of 1031 exchanges that allow for the reinvestment of capital gains, and extending the cost recovery period for residential real estate. In addition, the opportunity to a step-up in basis of assets at death would be eliminated, requiring unrealized capital gains to be taxed upon death. Biden has proposed removing the cap on SALT deductions, which could benefit homeowners in high-tax states.

Other real estate issues include: Additional government funding toward infrastructure projects, policy focused on affordable housing, and heightened attention around environmental, social and governance, or ESG, issues are on the table. At his 2020 State of the Union Address, Trump mentioned an infrastructure plan that would allocate almost $300 billion over the next five years. He would also look to take Fannie Mae and Freddie Mac out of conservatorship, increasing liquidity in the market. Biden has encouraged improving the rights of tenants concerning eviction, providing additional funding to section 8 subsidized housing and establishing a $100 billion affordable housing fund to spur construction and development. A focus on ESG development may provide government-funded opportunities for new development and the retrofitting of outdated properties.

The Trump administration’s effect on the industry has been: Under the 2017 Tax Cuts and Jobs Act, the introduction of Opportunity Zones allowed investors to defer capital gains and invest in designated economically distressed communities, which has resulted in billions in investments. The new section 199A allowed for a 20% deduction for investment in pass-through entities, an entity structure commonly used in real estate. One detriment of the TCJA was to homeowners. State and local taxes were capped at $10,000 for individuals, which largely affected those with higher real estate taxes. Outside of tax policy, during the administration’s run-up ahead of the COVID-induced downturn, market rents and property values have both seen increases broadly across sector types and markets.

By the numbers: $51 billion. The Joint Committee of Taxation estimates there will be $51 billion of deferred gains attributable to like-kind exchanges from 2019 through 2023. As these exchanges can only relate to real estate transactions, the removal of 1031 exchanges would have a direct impact to real estate markets and sales activity, negatively affecting high net worth individuals and family offices which enter into the majority of these exchange transactions. The impact would be further compounded if capital gain rates were to go up.

In preparation for the outcome, real estate companies should consider: Reviewing their investment plans for disposition of existing assets and timing for acquisition of new assets. Depending on what happens with capital gains rates, investors may look to sell their properties before rates go up or hold on to their assets until rates decrease further. Owners and operators will also want to talk with their tax advisors to make sure transactions and holding companies are best structured to create an optimal tax situation. Furthermore, high net worth individuals and family offices with significant real estate holdings may need to revisit their estate plans. Lastly, tax-sensitive investors may want to request cost segregation studies to best scope out opportunities for additional deductions.

To view other industry-focused election previews in our series, click here. Also, visit our 2020 Election resource center here.