Director of Federal Tax Policy
The President’s plan to raise rents on low-income working families, the elderly, and people with disabilities who receive rental assistance is particularly striking when contrasted with the real estate industry’s large tax benefits from the 2017 tax law. Commercial real estate is “perhaps the biggest winner” from the tax law, which will cost an estimated $1.9 trillion over its first decade and creates new loopholes for real estate investors while retaining some widely criticized existing tax breaks. Meanwhile, more than 4 million low-income households would face a $3.2 billion rent increase under the Trump proposal.
A core piece of the tax law, costing over $50 billion a year and comprising more than a fifth of its overall cost beginning in 2021, is a new deduction for pass-through income — income that owners of businesses such as partnerships, S corporations, and sole proprietorships report on their individual tax returns, which previously was taxed at the same rates as their other ordinary income. This new deduction disproportionately benefits the real estate industry, which uses pass-throughs extensively. And the deduction further benefits the real estate industry because it lets eligible business owners base the size of their deduction on the combination of the amount of wages their businesses pay and the value of the property they own — which represents a major victory for wealthy real estate investors operating through pass-throughs because real estate firms own lots of property. The law also exempted income from a specific type of real estate pass-through — real estate investment trusts (REITs) — from many of its so-called “guardrails” that are designed to prevent wealthy business owners from reclassifying their wage and salary income as pass-through income in order to get the new deduction.
While adding new tax breaks for real estate investors, the 2017 tax law also protected several existing tax breaks that were potential targets for elimination. A prime example is the “like-kind exchange” loophole, which lets individuals or firms trade similar assets (such as buildings or art work) without triggering capital gains tax on the increase in the value of those assets before the exchange. The tax law repealed this loophole but with an exception for real estate. The law also retained the “stepped-up basis” tax break, which lets the heirs of an estate not pay any taxes on the appreciation of an asset (such as an office building) that occurred during the previous owner’s lifetime. And it boosted the amount that a wealthy couple can pass on tax free to their heirs from $11 million to $22 million by doubling the estate tax exemption.
Putting it all together, a wealthy real estate investor can now pay a much lower tax rate on the rental income from his property, can exchange properties over decades without paying capital gains tax, and can pass on millions of dollars more in assets, including real estate, to his heirs tax-free.
Even as real estate investors receive expanded tax benefits, millions of low-income households would face sharp increases in rent under the Trump rent proposal. (Click here for its state-by-state impact.) For example, parents working at low-wage jobs who receive federal rental assistance – some of whom various real estate developers depend upon to clean their buildings – would pay a larger share of their income in rent. The increase would be particularly large if they incur child care costs in order to work; those child care costs are currently deducted in determining how much rent these families must pay, but the Trump proposal would eliminate that deduction, boosting these families’ rents markedly. Overall, the affected low-income working families would pay $1,300 more a year in rent, on average, leaving less room in their already tight budgets for everything else.
The proposal would also raise the “minimum rents” charged to households receiving federal rental assistance that have little or no income. In most cases, rents on these very poor households would rise by about $100 a month. Yet virtually all of the 700,000 or so affected families have incomes below the poverty line — in most cases, far below — and hence would find it hard to pay much higher rents. The 1 million or so children in those families are already among the nation’s most vulnerable; the Trump plan would expose them to added hardship and risk.
Raising rents on low-income families while giving the real estate industry large new tax breaks represents upside-down priorities that the country should turn right side up.