What Minneapolis Real Estate Investors Should Remember About Politics

Last week I listened to a presentation from a well-known speaker in the Twin Cities multi-housing community who warned if a certain political party won in the upcoming elections the 1031 or tax-deferred exchange would be abolished forever.

It reminded me that regardless of one’s political leaning, it’s important not to take anything the media or a friend says at face value; specially during a fractious election season.

The 1031 exchange has been part of the fabric of American real estate investing for over 100 years. During that time, members of both parties have suggested abolishing it as a way to generate more tax revenue for the government.

Most recently it appeared in President Biden’s proposed budget for 2025, and as part of the Democratic party platform.

Let’s not forget. The Constitution gave Congress, not the president, the power of the purse. And a party platform? When’s the last time you heard anything about it a week after the party’s convention? (Project 2025 is not the Republican Party platform.)

So a president’s budget is just ideas he or she floats before Congress. Knowing they will never agree to everything or perhaps anything in it, means it’s pretty much created just for the politics of it. Basically, they do it to get people to vote for them in an election, or to inspire people to help their campaigns.

Think of some of the presidents other ideas that fall under this category: partially privatizing social security (Bush) or charging tax on internet sales (Clinton). They died on the vine.

Biden’s plan would be to exempt up to $500,000 of capital gains tax per year per person. If you have more than that from selling a property, you’d have to pay taxes.

For most of us, this may be fine. However, it would be a disaster for the U.S. economy. It’s likely fewer people would sell. With fewer properties available. Of course, there may also be fewer buyers if the tax advantages of owning real estate disappear.

It also stands to reason if a multifamily owner holds rather than reinvests, there may be a dip in construction activity. After all, new owners typically like to add value by remodeling. With units in more worn condition, rents could decline as well.

In 2015 Ernst & Young estimated the cost of abolishing the 1031 exchange would cost the U.S. economy would be over $13.1 billion. Another study in 2020 estimated it would be closer to $20 billion.

In other words, it would be catastrophic. And since most politicians sole purpose is to get re-elected, there’s just no way this gets through Congress.

So most of the time, campaign promises and proposals are made with two hopes: of getting our vote now and you forgetting the promises candidates made later.

And that is true of every political party.

To be sure there suddenly isn’t an exception, however, it’s important to make our voices hear. Call or write your elected representatives and let them know where you stand.

It matters.