We recently poured our coffee and opened newspapers or browsers to learn that most of us are paying a much higher percentage of our incomes in taxes than America’s most noted billionaires, some of whom paid absolutely zero in some years. While nothing suggests conduct beyond masterful navigation of the U.S. tax code, a discussion of fairness seems fitting as well as a spotlight shone on how legislation has historically produced tax laws instituting preference of certain forms of income and assets over others. Individual perspectives on this topic may divide along ideology so I will not go there, yet the read got me thinking about the preferences relating to real estate.
Among the exceedingly rare points of consensus in our dysfunctional political environment is the steadfast support of real estate. Based on the undisputed financial and societal benefits of homeownership, legislation relating to private property rights and privileged tax treatment has proven sacrosanct through decades of swings in administrations and seats in Washington, DC. Consistency ensues, yet several related topics are on the table at present for which points of view may be shaped by the aisle side to which one gravitates.
Among the most cherished of benefits is the home-sale exclusion, which became effective in 1998, allowing single filers up to $250,000 and joint filers up to $500,000 of capital gains on a personal home sale tax-free. Of course, the average American does not have to worry about the potential of exhausting this benefit, but considering the amounts have not been adjusted for inflation, rapid property appreciation is leading to taxable events in more and more areas. Accordingly, one camp is calling for the exclusion amounts to be raised, while the other points to the trillions in tax revenues lost and suggests the benefit be capped based on owner wealth and income. The current Biden plan calls for the portion of realized gains exceeding $1 million in such events to be taxed closer to rates of ordinary income than capital gains.
Another potential conflict on the horizon involves the treatment of home sale gains at death. Currently, the step-up provisions within the code afford the ability to value the home at time of death, which becomes the new basis over which any gains would be taxable at a capital gains level at time of sale. Of course, estate taxes could apply if asset values are above the current $11.7 million limit. The American Families Act calls for the step-up provision to be modified for those with gains in assets (including a home) in excess of $1.25 million for single filers and $2.5 million if filing jointly, with amounts above taxed at an elevated capital gains rate.
Other real estate-related matters, some the result of the pandemic, are also controversial. Under the Trump administration, the Centers for Disease Control issued an order last September prohibiting the eviction of tenants who failed to pay rents due. A seemingly compassionate act during dire circumstances which has been subsequently extended to the end of this month under the Biden administration, it nonetheless has been claimed to shift the financial burden from tenants to landlords of which a significant percentage are individuals and small businesses for whom the income is vital. It remains to be seen if yet further extensions are ahead but, viewed through one’s chosen political prism, it either becomes an example of positive government support for those less fortunate or an egregious federal overreach into private businesses.
Differences in opinions regarding government’s role in housing also extend to the area of mortgage lending through government-backed loans and the GSEs (Government Sponsored Enterprises) such as Fannie Mae and Freddie Mac. Generally, conservatives view the federal mandate for increasing homeownership through such entities as a primary cause of the past housing crisis. In contrast, liberals view it as a needed tool to increase homeownership for more Americans, with the primary problem being market-driven subprime loans granted by profiteering banks and hedge funds. Since receivership of these entities, the dispute also extends to whether the profits, now healthy, should go to the Treasury or shareholders.
In the months ahead, decisions on the issues above and many others will come before legislators whose ideas differ sharply. There will be extensive debate about the government’s role in real estate and the wisdom or danger in raising tax revenues to focus on other priorities. Yet in the end, the typical gridlock in Congress will ultimately prevent substantive changes from passing and, even if partially enacted, would affect only a very small percentage of homeowners classified as most affluent. My prediction, when one cuts through the noise, is a continued and uncompromised support of real estate in the U.S. and a rare common ground amid petty, partisan bickering.
Budge Huskey is chief executive officer of Premier Sotheby’s International Realty.
