The Biden administration’s plan to limit a longstanding property-tax break could disrupt the business of investing in apartment buildings, discouraging both amateur and professional investors who helped fuel record multifamily sales.
The tax treatment enables investors to defer capital-gains taxes if they invest profits from a real-estate sale into another property. It is used to buy and sell most types of real estate, but it has been a primary source of capital for apartment-building investors. Multifamily sales enjoyed their biggest year ever in 2019, notching more than $184 billion of properties sold.
Karlin Conklin, principal of Investors Management Group, a company that purchases and renovates aging apartment complexes, said about one-third of the capital that her firm raises for acquisitions comes from these like-kind transactions, known as 1031 exchanges. Owing capital-gains taxes could mean less investment in existing affordable housing, she said.
“I think that the industry concern is that this will very much hamper transactions, and it will also then hamper reinvestment in improvements in local economies,” Ms. Conklin said.
President Biden proposed limiting the profits that investors can defer from 1031 exchanges to $500,000. U.S. investors save billions on their tax bills this way every year.
