The “Inflation Reduction Act” will only worsen inflation. What should you do?
The newest budget gift from Congress—the “Inflation Reduction Act”—will spend a staggering $369 billion on “green” provisions, $80 billion on growing the IRS and $64 billion on extending COVID-19-era subsidies, among other costs.[i] And the new spending is front-loaded compared to the Act’s tax increases, thereby causing the deficit to actually increase. Pumping government dollars into the economy is what let to record inflation in the first place. How can anyone argue that this Act will reduce inflation?
On the tax side, the new book minimum tax will find its way to consumers in the form of price increases (i.e., inflation) and layoffs. A new army of tax auditors will set its sights on small businesses, whose owners, employees and customers will suffer the consequences. According to the Joint Committee on Taxation, the Act will result in a tax increase for every income category.[ii] The Tax Foundation found the Act’s increase in corporate taxation would reduce economic output by 0.2%.[iii]
In the face of such daunting circumstances, what defensive measures can real estate investors take?
Vote Smart. If you haven’t already, start paying attention to your local candidates for Congress. If you support politicians who are clear about their fiscal policy positions, you cannot rightly complain about their voting record later. More importantly, the damage will already be done.
Exchange Out. Now is the time to unload your poorly-positioned rental properties. If you are in a rent-control state with egregious regulations, negative migration rates and increasing taxes, you can still 1031-exchange and relocate your equity to greener pastures. Despite early fears, the Inflation Reduction Act did not contain any provisions regarding 1031 exchanges nor the step-up in basis at death. The “swap ‘til you drop” tax strategy remains a cornerstone of tax planning for real estate investors.
Seek Inflation-Hedge Opportunities. Inflation is likely here to stay; historic low interest rates are not likely to return. We can safely assume interest rates eventually will drive up capitalization rates across the real estate spectrum. If all of that holds true, properties with flat net operating income (“NOI”) cannot preserve their value over time. The key, then, to capital preservation in a rising-cap-rate environment is NOI growth. Examples of real estate sectors with potential for meaningfully upward NOI include market-rate apartments, self-storage, hospitality and senior housing. Conversely, long-term NNN leases with nominal rent bumps offer little protection against rising cap rates.
For more information about tax-advantaged securitized real estate investments, please call 1031 Capital Solutions at 1-800-445-5908 or visit our website, 1031capitalsolutions.com.
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There are material risks associated with investing in real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.
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