Joe Biden is the projected winner of the presidential election, while control of the Senate will be won only by a slim margin following runoff elections for Georgia’s two seats in January. What does a divided government mean for the middle market? RSM is looking at the policy implications and key issues for various industries. This is one in our series of industry-focused outlooks for a Biden administration.

According to Joe Biden’s plan:

Based on Biden’s campaign platform, long-term capital gains, currently taxed at 20%, would be taxed at ordinary income rates—hurting after-tax returns on real estate, which are almost always considered a long-term investment.

Furthermore, Biden vowed to boost tax rates for corporations (from 21% to 28%) and high net worth individuals (from 37% to 39.6%). Biden has also proposed the removal of 1031 exchanges that allow for the reinvestment of capital gains as well as the extension of the cost recovery period for residential real estate.

In addition, the opportunity for a step-up in basis of assets at death would be limited, requiring unrealized capital gains to be taxed upon death.

Biden advocates removing the cap on state and local tax deductions, which could benefit homeowners in high-tax states. And finally, Biden’s suggestion of a $15,000 tax credit for first-time homebuyers will be a benefit to entry-level homebuilders.

What a closely divided Senate means for real estate:

The probability of wholesale changes to tax regulations are unlikely with a closely divided Senate in place to offset broad-brush attempts by a Democratic White House.

However, there are areas that both sides of the aisle can agree on. For example, we expect the opportunity zone program to develop disenfranchised areas to remain, but it may be reformed to require reporting more data on the impact of the opportunity zone investments. It is also important to keep in mind that some of the rules for opportunity zones could be changed by Biden’s appointed Treasury secretary, rather than by Congress.

What room for growth or evolution exists in real estate?

Given Biden’s focus on transitioning away from fossil fuels to green energy, we may see more incentives for energy-efficient buildings and the use of smart technologies. The initial support from Biden for a large infrastructure bill is encouraging for the construction space; the industry has long urged such a package to help upgrade America’s infrastructure, which was most recently rated D+ by the American Society of Civil Engineers. As currently planned, $2 trillion would be put forward, casting a wide net of funding for highways, green spaces, waterways, electric grids and expanded technology, including broadband and 5G. While this plan is promising in helping to fix the cracks in America’s infrastructure, the ultimate shape and scope of the bill will depend on Congress reaching a deal where both parties agree.

Meanwhile, the success of real estate investment will be dictated by the health of the economy rather than the administration. A recent Cushman & Wakefield report shared that since 1979, National Council of Real Estate Investment Fiduciaries property index returns have averaged better than 8.5% annually under both Democratic and Republican administrations.

Questions that frame the path forward:

• What will infrastructure development look like under the new administration, following stalled attempts by the Trump administration to put forward an initiative?
• Will affordable housing efforts provide new opportunities for construction, given that Biden has advocated improving the rights of tenants?
• Will opportunity zones, which provided tax incentives to real estate investors who developed underserved metropolitan areas, be continued?
• Will a push toward green energy provide opportunities for developers?
• What sort of stimulus will be provided to struggling tenants both in residential and commercial properties?