The legislative sausage-making factory has been running 24/7 for weeks now, and it looks like we are finally getting close to the end of the line in terms of the Build Back Better Act and the so-called Bipartisan Infrastructure bill.
On Thursday October 28th the text of the proposed Build Back Better Act was released, though some say it is still a work in progress. The infrastructure bill has already passed a Senate vote and the House intends to vote on both bills together, exactly when we don’t yet know.
Our focus here is on the Build Back Better Act. When originally proposed as the American Families Plan by the White House it contained several proposed tax hikes that would affect commercial real estate, and we must admit, that threat was keeping us up nights. Among other tax hikes, the administration and Democrats in Congress had plans to tax capital gains at ordinary rates, eliminate the 1031 exchange rules and do away with the step-up rule, a widely used wealth transfer tool. Any one or combination of those changes to the tax code could have undermined the fundamentals of real estate investing and sent the sector into correction territory.
We are pleased and relieved to see that none of those proposals made it into the legislation, and we are happy that there were enough legislators on both sides of the political aisle who had the good sense not to support them. This is very good news for commercial real estate. Without the disruption of new tax law, it gives the market a chance to continue unabated to respond to normal economic forces that will determine future market trajectory.
While the worst of the tax hikes are not in the bill, several others are. The largest corporations will be hit with a minimum tax of 15% on book income and those making more than $10 million per year will see a surcharge of up to 8% on their income tax bill. Foreign-sourced profits will also see an extra levy. While these new taxes may contribute to inflation as they are passed along to consumers, they shouldn’t have a significant impact on commercial real estate markets across the country. According to the bill’s authors only the top 200 companies and .2% of individual taxpayers would be directly affected.
As we write this post, we still don’t know if and when either bill become law, but it appears likely to us that a close facsimile of what was released on October 28th will make it to the President’s desk. That said, there is still a chance that neither bill passes, an outcome that would be most favorable to commercial real estate. The Bipartisan Infrastructure bill does not contain any tax increases, so it is not likely to impact the commercial real estate market even if it does pass. Though, the injection of that borrowed money could contribute to the inflationary cycle the economy is currently in.
We will be watching the drama unfold in the coming days and will keep you informed. Thankfully, it appears that the commercial real estate market may have dodged a bullet. Give us a call to discuss if you like. We’re here to help.
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