The 2025 Federal Budget: What Tax Changes Might Impact Real Estate

President Biden has released his 2025 budget and supporting tax revenue proposals, commonly known as the Green Book.

While the Green Book serves as a conceptual starting point for discussions with Congress, it provides insight into Democratic tax policy. These proposals are subject to legislative approval (which may be unlikely in the Republican controlled House) and may evolve during the legislative process.

A few of the more significant proposals applicable to the real estate industry include:

Carried interest taxation

• Proposed recharacterization of long-term capital gain from “carried interests” to ordinary income when such income is derived from an “investment services partnership interest.”
  • An investment services partnership interest is an investment partnership held by a person who provides partnership services. A partnership qualifies as an investment partnership if:
    • Substantially all assets are investment type assets (securities, real estate, interest in partnerships, etc.), and
    • Over half of the partnership’s contributed capital is from partners holding the interest as an investment rather than in connection with a trade or business.
• Proposal effective for taxable years beginning after December 31, 2024.

1031 exchanges

• Biden proposes to effectively repeal the ability to defer gain in excess of $500,000 for each taxpayer ($1 million with respect to married taxpayers filing a joint return) per year connected to a real property exchange. Any gain above such thresholds would be recognized as taxable gain in the year of transfer.
• Proposal effective for exchanges completed in taxable years beginning after December 31, 2024.

New Market Tax Credit (NMTC)

• Biden proposes the permanent extension of the NMTC. This would allow for continued investment in low-income communities and provide greater certainty for investment planning purposes.
• The annual allocation would be $5 billion in 2026 adjusted for inflation thereafter.

Neighborhood Homes Credit (NHC)

• The Green Book introduces a new tax credit, known as the Neighborhood Homes Credit.
  • The proposal would create a new allocated tax credit to encourage:
    • new construction homes for sale
    • substantial rehabilitation of homes for sale
    • substantial rehabilitation by existing homeowners who will remain in their communities.
• The credit would be limited to no more than the lesser of 35 percent of development costs and 28 percent of the national median sales price for new homes.
• The proposed credits would be eligible for allocation beginning in 2025.

Low Income Housing Credit

• Biden proposes increasing the Housing Credit Dollar Amount (HCDA) allocation to the states.
• In addition, the proposal reduces the Private Activity Bonds (PAB) requirement to 25% from the current 50% requirement.
• The proposal would apply to contracts entered into after the enactment date.

Transfers of appreciated assets by gift or on death

• Biden proposes for the donor or deceased owner of an appreciated asset to realize a capital gain at the time of the transfer. This gain would be taxable income to the donor or to the decedent’s estate on the Federal gift or estate tax return.
  • Certain exclusions would apply, including a $5 million per-donor exclusion.
• Proposal effective for property transferred after December 31, 2024

Corporate income tax rate increase

• Biden proposes raising the corporate income tax rate from 21% to 28%. If enacted, this would significantly impact taxable corporate transactions and the overall cost of doing business in corporate form. It could also affect tax attributes tied to the corporate rate, such as net operating losses.
• Proposal effective for taxable years beginning after December 31, 2023.

Individual income tax rate increase

• Biden proposes to raise the top marginal individual income tax rate from 37% to 39.6%.
• Proposal effective for taxable years beginning after December 31, 2023.

How we can help

While all of this is only proposed and may never become law, it’s good to be aware of possible tax changes, especially if you’re interested in benefitting from tax planning strategies. More likely on the horizon is the sunsetting in 2026 of many beneficial Tax Cuts and Jobs Act provisions. Explore some of the upcoming changes and learn steps you should consider now to reduce your tax impact.