The housing market doesnt operate in a vacuumand tax policy has been quietly steering its course.
In 2021, home values rose faster than ever recorded.
In dollar terms, the typical homeowner gained roughly $50,000 in home equity in a single year.
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Pandemics Effect on Housing Demand
The COVID-19 pandemic also influenced market trends.
At the same time, construction of new homes lagged behind.
The United States has been underbuilding housing for years, but it became more acute as demand spiked.
Moderation in Price Growth
Home price trends have started to moderate since the frenetic peak of 2021.
Higher borrowing costs cooled buyer demand and caused home price growth to slow.
When you sell a property for a profit, the profit is generally subject to capital gains tax.
Proposed vs.
However, Congress did not pass this increase.
The proposal met resistance and ultimately was not included in the final legislation.
Real estate investors were also closely watching proposals to change the 1031 like-kind exchange rules.
Any gains above that cap would be taxed in the year of the exchange.
Once again, however, this reform was not enacted into law.
The like-kind exchange rules for real estate have remained unchanged.
Ongoing Tax Benefits for Investors
Other tax benefits for investors introduced earlier continued to play a role.
These provisions unchanged since 2018 continue to benefit rental owners by lowering the effective tax rate on rental earnings.
Looking ahead, the issue of capital gains taxes on real estate is not settled permanently.
Economic analyses indicate this has put downward pressure on home values in affected areas.
This discrepancy means that in high-tax states, owner-occupants lost some tax advantage, while rental owners did not.
The mortgage interest deduction limit ($750,000 of loan principal) likewise mainly affects buyers of high-priced homes.
Institutional vs.
This was up from about 12.6% in the same quarter of the previous year.
What Drove Investor Activity?
What was driving this investor surge?
A combination of factors.
First, rents were soaring, making the prospect of buying homes to rent out extremely attractive.
Tax Advantages for Institutional Buyers
Tax considerations also give institutional investors some advantages.
This can make a profitable rental property show little taxable profit.
Individual homeowners dont get anything similar.
Its not just large corporations mom-and-pop investors also ramped up purchases.
But evidence shows the big players were especially aggressive in certain markets.
This was largely due to higher interest rates and cooling home values, rather than any tax changes.
Many highly leveraged investors pulled back when financing costs rose and when home price growth stalled.
Some institutional buyers also hit pause to assess the changing market dynamics.
A cornerstone of federal housing policy is the Low-Income Housing Tax Credit (LIHTC).
Recognizing the severe shortage of affordable rentals, the current administration has sought to expand LIHTC.
This would be a new federal tax credit to encourage building or rehabbing homes for owner-occupancy in distressed communities.
The budget proposal allocates $19 billion for this credit over 10 years.
Its projected to support the construction or rehab of 500,000 homes in low-income areas if implemented.
The Inflation Reduction Act of 2022 included extensions and expansions of tax credits for green building and energy efficiency.
From 2021 through 2022, the country saw record-high rent inflation.
Even through 2022, rents kept climbing in most cities.
By early 2023, rent growth began to moderate.
Tax Policys Indirect Effects on Rental Markets
How do taxes play into this?
One angle is that landlords tax expenses (or savings) can affect rent levels.
LIHTC and similar programs specifically create below-market rent units.
In many cities, a significant number of multifamily units were under construction in 2022 and 2023.
The relative stability of investor-friendly tax provisions helped encourage a lot of money into housing during the boom.
Zillow projects existing home sales to rise about 3.3% in 2025, after a sluggish 2024.
More sales could mean a bit more liquidity and opportunity for both buyers and sellers.
Affordability remains a central challenge.
In conclusion, the period since January 2021 has been a dynamic one for residential property investment.
