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People and Politics

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In an ongoing series, we profile the people who are disrupting the rental housing industry, shaping the housing debate in California, or just interesting people that give a fresh perspective.

Dan Kalb

Oakland has become the latest bastion of tenant protections, and Dan Kalb can take the latest credit as the chief architect behind a measure to extend “just cause” eviction protections to tenants living in owner-occupied duplexes and triplexes throughout the city. To Kalb, it’s about fairness. “People should have the right to stay where they want to stay,” he was quoted as saying in this San Francisco article. “If they’re already living somewhere, they should have the right to continue to live there as long as they’re not breaking any of the rules. The protections and the rules that exist for some renters — most renters in the city — should also exist for renters who live in these smaller buildings.” We took issue and were quoted in the same piece. 

Alexander Chatzieleftheriou

Blueground wants to make it easier to provide smart and hassle-free housing for business travelers and transient individuals. The housing startup landed in San Francisco with Alexander Chatzieleftheriou at the helm and he stands to disrupt corporate housing as we know it.

Hillary Ronen

Housing issues play a strong role in District 9 and for Supervisor Hillary Ronen, a concern has been displacement in the Mission, particularly among the Latino community, and she is intent on intervening. Another vexing problem in her district is the homeless crisis and after about 18 months on the job, the Supervisor says she’s transitioning from crisis management to trying to address the root cause. Read the full interview here.

Michael Weinstein

After nearly a quarter of a century of trying, tenant activists in California could be on the cusp of repealing the Costa-Hawkins Rental Housing Act, thanks to Michael Weinstein. The president of the AIDS Healthcare Foundation led the charge for expanded rent control statewide and put millions of dollars behind it. His cause has now reached critical mass.

San Francisco’s mayoral race has become charged in a very Bay Area way in an epic battle between progressives and moderates. This New Yorker article says the fractious contest will define the future of the left and will serve as a litmus test for the way it is thinking as a collective.

No matter what your ideology may be, whoever inherits the final 18 months of the late Mayor Ed Lee’s second term will have to tackle housing issues and shape policies that are consequential to rental property owners in a strong-Mayor town.

We wanted to put a pulse on where our industry partners stand, and the report card is in. The San Francisco Association of Realtors, Small Property Owners of SF and the San Francisco Apartment Association all endorse lifetime renter and moderate Board of Supervisors President London Breed. Breed is both pro-tenant and pro-developer who believes the affordability crisis is driven primarily by a lack of housing supply.

“The housing crisis has grown visibly worse recently, but it is — at its core — the result of decades of bad housing policy in San Francisco and the Bay Area.” ~ London Breed

This sentiment and balanced approach seems to resonate well with owner advocacy groups, who are also in agreement in opposing Mark Leno or Jane Kim. Predictably, all are in unison by opposing Proposition F, dubbed the “No eviction without representation Act of 2018,” which would establish a City-run and funded program to provide free legal representation for all tenants in the city who are facing eviction, regardless of the underlying cause.

Sitting Superior Court Judges Andrew Y.S. Cheng, Curtis E.A. Karnow, Cynthia Ming-mei Lee, and Jeffrey S. Ross are viewed to be more moderate than the progressive candidates vying for the bench and so anyone tethered to the rental housing industry may be advised to leave all enough alone.

We’ve noted before that the fraternity of rental property owners and the professionals who service them can band together to defeat repeal efforts of the Costa-Hawkins Rental Act, and in the same spirit, urge you to get out to the polls on Tuesday to assert your voice.

Even as we continue to keep an eye on the big picture and follow legislative/regulatory changes and the influencers that shape policy, you can count on Bornstein Law to handle the more mundane legal issues and landlord-tenant disputes that arise in your rental business. Contact us for informed advice.

The jury is still out for the Tax Cuts and Jobs Act (H.R.1), more popularly known as tax reform or the GOP tax plan. For the purposes of this discussion, we’ll refer to it as the TCJA, a bill that has been a source of confusion and opposing viewpoints.

Regardless of your stance on tax policy, the law will have undeniable implications for Bay Area property homeowners. After fielding questions from owner-occupants and investment property owners alike, we wanted to chime in on how this may affect their bottom lines.

Deductions for homeowners

As part of the tax code restructuring, the TCJA includes a mortgage interest deduction for homes that cost $750,00 or less. If you throw a dart at a map of North America, it’s a huge amount of money, unless that dart lands in California’s largest metro areas. Alameda, Marin, Orange, San Francisco, San Mateo, Santa Clara and Santa Cruz counties all have average home prices north of $750,000, so the end result of the TCJA is a tax break for homeowners that prices out most Bay Area properties, even the teardowns.

Some would argue that for those buying $750,00 homes, the tax write off is not calamitous – people who are bent on buying are bent on buying – and that limiting the mortgage interest deduction would not dampen the search efforts and enthusiasm of aspiring homeowners. More backdrop here »

The California Association of Realtors takes issue with that sentiment. It was at the forefront in opposing the bill, arguing it dramatically weakens the tax incentives for new homeowners and that the lower mortgage interest deduction cap punishes homeownership in high-tax, Democrat-leaning states like California.

In a heartfelt message to members we published on our website, C.A.R. President Steve White lamented that the TCJA puts home values at risk and undercuts the incentive to own a home.

Redfin offered their take, claiming that, “pass-through tax cuts, combined with changes in the ability to deduct state and local taxes will continue to drive American migration, where people from coastal cities strike out for affordable places to live.”, in the words of chief economist Nela Richardson. They predict that the tax cut could limit the supply of homes on the market by reducing the landlord’s incentive to sell. The National Association of Home Builders went a step further by warning it could cause a national housing recession.

Rental property owners, on the other hand, are not seeing the sky fall.

A boon for the rental housing industry?

The National Apartment Association, in partnership with the National Multifamily Housing Council, has applauded the tax overhaul, touting it as a smart tax policy.

One of the most adorning centerpieces of the TCJA is the protection of flow-through entities. Not surprising, because three-quarters of apartment properties operate as flow-through entities, including residential landlords who own their rental property as sole proprietors, real estate investment trusts, LLCs, S corporations or partnerships.

Under these tax provisions, businesses avoid the double taxation of paying corporate and individual taxes. Instead, taxes are applied solely at the individual level. Unlike owner-occupants, rental property owners can write off expenses like mortgages, repair, and management costs. Since these costs of doing business are deducted from the income the property produces, investors are only taxed on that income, so by reducing it, the investment acts as a tax shelter.

The TCJA, however, creates a new tax deduction for individuals who realize income through pass-through entities under Section 199A, also known as the Qualified Business Income Deduction, which arose from the Tax Cuts & Jobs Act of 2017. If rental activity qualifies as a business for tax purposes, as most do, owners may be eligible to deduct an amount equal to 20% of their net rental income. This is in addition to all other rental-related deductions. If landlords qualify, they are effectively taxed on only 80% of rental income.

There are many rules and limitations, of course, and as with any major revisions to the tax code, there will be modifications and interpretations which will change how this creature can be used.

The rich get richer?

Although wealthy real estate investors will be beneficiaries of the new tax rules, anyone who invests in the rental real estate is likely to benefit. While critics note that Washington political figures emerge richer, perhaps they overlook the many small, mom-and-pop landlords. As we noted in this earlier post, these responsible landlords are stewards of the community, treat their tenants well, and are the driving force of affordable housing. They did not cause the housing crisis and indeed, have been adversely impacted by it with rising costs.

Pass-throughs are shrouded in mystery for many observers, with an accompanying undercurrent that they are an unseemly and arcane vehicle for corporations to avoid taxes or otherwise create some sort of mischief. In fact, roughly 95% of all businesses are categorized as pass-throughs, and they are very common for small business owners. In a pass through, profits are merely passed through to the owners of the business, who then report that income on their individual tax returns and pay tax on it, with the rest of their normal income and thus, there is nothing evasive.

Parting thoughts

Like most other matters we encounter at Bornstein Law, the law is cleaner on the page than it is in the real world, and many ambiguities need to be wrinkled out. Our job is not to legislate, but counsel property owners and protect their real estate investments given their unique circumstances. While there is no shortage of viewpoints on tax reform circulating around the web, it is strongly recommended that you muffle the noise and sit down with an attorney to discuss your unique circumstances and real estate goals.