Authors
While the real estate industry is generally not dramatically affected by the potential swings of an election year, there are subtle differences between the policies put forth by each party in the upcoming U.S. election that could have material impacts on investments in U.S. real property. In this article, we discuss the effect these changes could have and provide practical benefits to stakeholders navigating this sector.
We recently wrote about this particular movement in American politics, and how it could lead to expanded restrictions on foreign ownership of U.S. real property. Regardless of the outcome of the 2024 elections, we expect that the momentum behind further restrictions on foreign ownership will continue unabated, and we urge Canadian real property investors (even on an indirect basis) to remain vigilant.
Canadians are the largest foreign holders of U.S. land, and restrictions on ownership that ostensibly target hostile foreign actors sometimes are drafted broadly enough to apply to our friends to the North. We also expect that this surge may lead to an increased mandate for the Committee on Foreign Investment in the United States (CFIUS), which could impact inbound Canadian deal activity in many sectors (although Canadians remain on the “whitelist” of excepted foreign states).
One of the great challenges for the new President and Congress will be how to handle the expiration of the 2017 “Trump Tax Cuts”. Fiscal accounting will have a large impact on whether it is politically realistic to extend all (Republican) or a majority (Democrat) of those tax cuts in a “revenue neutral” package. 1031 exchanges (named for the relevant section of the tax code) allow sellers of real property to defer paying capital gains tax where they reinvest or “exchange” real estate sale proceeds into a similar property. While we expect that a Trump administration would leave Section 1031 alone (Mr. Trump is a real estate developer, after all), 1031 exchanges are squarely in the repeal crosshairs of the Biden administration to help bridge the gap from a revenue perspective. Given that the 1031 rules were put in place to allow for greater liquidity and transaction volume in the real estate industry, we would expect that a 1031 repeal would create a sustained period of friction in the market while impacts on transaction volume and pricing shake out.
While it is difficult to predict all consequences of repeal, a few potential impacts are worth highlighting.
Large federal appropriations take time to go from the stroke of the President’s pen to the actual deployment of funds. As a result, big headline laws like the Infrastructure Investment and Jobs Act (the IIJA), signed by President Biden in November 2021, have a continuing material impact. The IIJA provided for US$550 billion in new infrastructure spending over five years, including US$110 billion for new roads, bridges and major projects, and US$66 billion for rail improvements. Discretion is afforded to federal agencies to allocate this capital based on various factors, and political factors certainly play a part. A new Trump administration, for example, might be more willing to redeploy funds earmarked for green energy improvements somewhere else, or more likely to rebuild a bridge in Birmingham than Boston. Alternatively, a Democratic election victory would suggest there is a mandate for a Democrat President to continue the former Biden administration’s acceleration of green investments, including electric charging stations (US$7.5 billion already allocated in the IIJA) and solar farms.
Given that access to infrastructure is a major element driving real property development, where these funds get deployed will define the types of corollary projects that become viable. Two examples are instructive.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2024 by Torys LLP.
All rights reserved.