Last week, two Democratic senators (Chuck Schumer of New York and Joe Manchin of West Virginia) announced an agreement on draft legislation that salvages some of last year’s Build Back Better framework. Much smaller in scope, the bill targets healthcare and climate action, also making some significant tax changes even as President Joe Biden claims individuals making less than $400,000 a year will not see their taxes go up.
Passage of the bill remains far from certain, with Senate Republicans expected to universally oppose it and Democrats still trying to rally their caucus.
Unlike Build Back Better, this bill—dubbed the Inflation Reduction Act—contains minimal direct investments in housing, though it does heavily incentivize efficient or sustainable home features. Two of the tax provisions could theoretically have significant effects on real estate—though in a memo released yesterday, the National Association of REALTORS® (NAR) highlighted many changes that have been discussed over the years but were not included in the bill.
“We are pleased and relieved that the tax offsets proposed in the Schumer-Manchin deal did not include any of about a dozen other tax increases that would have hit real estate investment much harder,” wrote NAR senior policy representative Evan Liddiard.
These include so-called “like-kind” exchanges, which currently allow investors to essentially swap properties without paying capital gains taxes. Proposed changes to this rule, which primarily benefit wealthy people, did not make the final draft of Build Back Better, either.
The Schumer-Manchin bill also does not change capital gains tax rates and avoids expansion of the net investment income tax rate, Liddiard noted. But an NAR spokesperson told RISMedia that they are keeping a watchful eye on what might change as negotiations go forward.
“Although proposals to the Schumer-Manchin deal are not yet final, we are monitoring conversations on Capitol Hill to ensure no policies advance which would limit or repeal section 1031 like-kind exchanges, increase the capital gains tax rate, or change the current rules on the step-up in basis of capital assets at death,” the spokesperson said.
What is included in the bill are changes to carried interest—a tax provision that allows income to be taxed at much lower capital gains rates in some circumstances. The bill changes the holding requirement for this provision from three to five years, which means investors could not as easily take advantage of the lower tax rate. It explicitly exempts individuals making less than $400,000 from the changes.
NAR has long lobbied against closing this loophole—which again, mostly benefits the very wealthy. Liddiard wrote that this time around, the specific language used is different.
“It appears that the authors of the deal intended to exempt most real estate deals from the carried interest change. We are working with other real estate trade groups to quietly point out to Democratic leaders how the draft language can be improved to do this better,” he said.
Another major tax change in the bill—though seemingly not likely to directly affect real estate—is raising the minimum corporate tax rate to 15%. That proposal has received international attention as governments have tried to rein in multinational corporations that use complex schemes to pay relatively little in taxes.
On the more tangible side, the bill’s tax incentives for wind, solar and various upgrades to energy infrastructure could have an extremely long-lasting and powerful effect on housing. The bill offers significant tax breaks for energy-efficient water heaters, HVAC systems, windows and more for homeowners in their primary residences and significant help for builders upgrading or creating new energy-efficient housing stock.
Depending on the exact energy savings achieved, projects for homeowners can be subsidized up to $200,000 for a multifamily building, or $8,000 for a single-family residence. The programs are set to last for about a decade.
Much of the language in the bill is broad, and does not require upgrades or appliances to use a specific kind of energy, as long as they are more efficient. One program does specifically incentivize electric appliances and wiring upgrades, up to $14,000 for a single home.
Relevant to home builders and developers, the bill seeks to incentivize states to upgrade their codes in order to focus more on energy efficiency. It also subsidizes the labeling and identification of low-carbon construction materials to encourage their use, and appropriates around $1 billion for loans and grants to upgrade affordable housing.
Credits for the construction of energy-efficient homes are also extended to the end of 2032 by the bill, which also changes some of the language related to these credits.
Nothing in the bill is set in stone, with expectations that even some Democrats in the House might oppose or try to modify it. Liddiard said NAR is “watching the situation very closely” while specifically encouraging Arizona residents to lobby centrist Democrat Kyrsten Sinema, who has often been a swing vote, on the carried interest change—something she has previously opposed.
“NAR has been closely following the tax provisions included within any reconciliation package to ensure changes won’t negatively impact housing investment and inventory,” the NAR spokesperson concluded.