The real estate industry is reeling in the face of new legislation, extended eviction moratoriums, environmental regulation and higher taxes.
Now, trade organization and industry leaders vow to fight back.
Most recently, industry executives are warning that the Biden administration’s plans to hike the tax on long term capital gains above $1 million from 20% to the top bracket would result in a top bracket rate of 43.4%.
In late May, the administration also revealed that the capital gains tax hike would be retroactively applied to assets sold after April 2021.
“It’s a perfect storm with the worst potential outcome,” said Robert Gilman, a partner with the accounting firm Anchin & Block.
Gilman notes the possible ending of 1031 exchanges — a method of reinvesting sale proceeds that is widely used to avoid paying capital gains taxes — as another blow to the biz.
“If you did a 1031 exchange in May, are they going to say it now doesn’t count?” he said.
Worse still, when New York State and city taxes are added, investors making just over $1.1 million are suddenly facing a payout of 56.9% in taxes.
“Investors are going to be holding onto buildings,” Gilman said. “Usually when someone buys a new building, they spend money on the trades and so that will also hamper the construction industry.”
But Adelaide Polsinelli, a commercial broker and vice president with Compass, is hopeful it isn’t all doom and gloom.
“You will see real challenges but the real estate people will get creative with master leasing and 49-year leases,” she said. “We have very smart accountants and very smart lawyers and they will come up with transactions and we’ll be two steps ahead of the government.”
While some changes affect just real estate professionals, the bump in tax rates will also affect regular Joes who own property.
“If they’ve owned their home for 25 years, and assuming they make above the threshold where the capital gains increase will come into play, it will affect everybody,” Gilman warned.
For example, a couple who bought a city condo for $1 million and sells for $5 million will have a $3.5 million gain (after the $500,000 primary residence exemption). The proposed taxes on the gain will be about $1.9 million — nearly $700,000 more. “That’s significant,” Gilman said.
For example, a $5 million purchase that is now worth $15 million would owe $5.5 million in taxes upon its sale — with family estates also facing a huge bill instead of a step up in the value.
Meanwhile, New York State is raising its own top bracket for those making from $1,077,550 to $5 million from 8.82% to 9.65%, while those making over $25 million will be paying 10.9% to the state.
“There are people I know who are leaving New York and don’t want to pay the income tax rate — and the SALT [ state and local tax] cap is brutal,” said attorney Jay Neveloff, a partner with Kramer Levin, of the federal $10,000 cap on the deduction of state and local taxes on federal income tax returns. “New York will lose revenue because their tax rates are also going up so will they [really] have a net gain by having higher taxes?”
Another issue facing property players is the end of the state’s Affordable NY Program in June 2022.
The program provides tax abatements for creating affordable housing in 30% of an apartment building. This is also important to the not-for-profit organizations that partner with developers on the affordable housing.
“People are trying to get into the ground and get the benefits,” said Jonathan Mechanic, a partner with the law firm Fried Frank. “Once you can’t qualify, people will want to think long and hard about adding affordable units.”
New buildings are taxed at a much higher rate than older ones, so developers need that abatement to accept lower rents on the affordable portions, argued Jeffrey Levine, chairman of Douglaston Development.
“If the [legislators] don’t have the courage or wisdom to correct the disparity, they have to put together a tax abatement that makes economic sense,” Levine said.
The industry also continues to gripe with eviction moratoriums, which they said enabled tenants who were well-capitalized and did not suffer from pandemic to skip rent.
“The law could have been written differently to ensure it was properly targeted,” said James Whalen, president of the Real Estate Board of New York.
A former prosecutor and Legal Aid Society lawyer, Bess Freedman, CEO of Brown Harris Stevens, added that “landlords need to be able to pay their bills and we need to have a balance that makes sense.”
Another proposed tax on vacant retail stores is “nonsensical,” Mechanic said.
“The next mayor should be focused on reviving the city and reviving the economy and encouraging development and encouraging people to return to the city.”
Finally, Local Law 97, which regulates energy emissions, and the creation of sanitation districts are also causing commercial landlords agita.
With so much happening so quickly many industry stake holders said that it feels like being run through an obstacle course. Nevertheless, they remain resolute.
“We will take on the challenge and work with elected offices to get to a place of policy making going forward,” said Whalen.