How The New Stimulus Package Will Help Real Estate Investors in 2021Financial Planning
BY CYNTHIA MEYER CFA®, CFP®, CHFC®
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What you'll get from this article:
🏠 how the new coronavirus relief package directly impacts tenants' ability to pay rent
🏠 HOW the emergency rental assistance program works
🏠 will I get the recovery rebate stimulus payment?
🏠 accessing new funding for the paycheck protection program for small businesses
🏠 does the new stimulus relief do enough to address the pending eviction crisis?
What is in the new stimulus package that could help real estate investors? There is a lot to unpack here. The package includes provisions that will help both renters and landlords in the short run, as well as provide a broad, temporary boost for most taxpayers.
Directly Impacts Tenants’ Ability to Pay Rent
The new coronavirus relief package passed last Congress month and was signed into law by the President on December 27, 2020, as part of H.R. 133, The Consolidated Appropriations Act. It is a monster piece of legislation that outlines spending and provides funding for the U.S. government’s 2021 fiscal year. You can read and search the text of the bill here.
The stimulus package includes financial relief which can directly impact tenants’ ability to pay rent. This helps:
- Renters stay in their rentals; and
- Landlords who are paid current and back rents catch up on mortgages, property taxes, utilities, and other costs.
The legislation also provides relief to taxpayers – including real estate investors -- with a tax rebate based on income (the “stimulus payment”), relief to small businesses, and other tax credits
Help for Struggling Renters by Paying Rent to Landlords Directly
The legislation provides $25 Billion in funding for the Treasury Department to create an Emergency Renter Assistance Program. This will be distributed to state and local grantees to administer the program and distribute assistance, so it will take some time to reach individual property owners. Cities with populations greater than 200,000 can receive funds directly for distribution.
Renter assistance includes up to 12 months total rent and utility payments, with additional 3 months if necessary (assuming program funds are still available).
Landlords are paid directly. There is an application process for the renter – but the landlord can help a tenant apply if needed. When approved, funds are paid directly to the property owner. If the rental property owner declines assistance, funds are paid directly to the tenant to make rental payments. Applying for or on behalf of a tenant requires their consent.
Households eligible for renter assistance:
- Must be in arrears on rents accumulated during the pandemic;
- Make less than 80 percent of the area median income (AMI);
- Have one or more household members who can demonstrate risk of homelessness or housing instability; and
- Have one or more household members who qualify for unemployment or experienced pandemic-related financial hardship.
Assistance is prioritized for renter households with incomes below 50% of area median income (AMI) and renter households who are currently unemployed and have been unemployed for 90 days or longer. Eligibility assessment uses 2020 income and will be recertified every 90 days for ongoing assistance.
CDC eviction moratorium is temporarily extended.
The CDC eviction moratorium has been extended until January 31, 2021. State and local eviction moratoriums may be longer, depending on where you are located. Renters must proactively fill out a form and send it to their landlord to receive protection under the CDC order.
The Emergency Rental Assistance program also gives access to housing counseling to help struggling renters remain stably housed. Search for your state’s rental assistance programs on the Dept. of Housing and Urban Development (HUD.gov) and the National Low Income Housing Coalition (NLIHC.org).
Recovery Rebate Checks to Eligible U.S. Taxpayers
A majority of U.S. taxpayers will be eligible to receive a 2020 Refundable tax credit up to $600 per person including dependents. This will help many renters who are struggling to pay their rent, utilities, and put food on the table -- as well as income property owners who are paying mortgages, taxes, maintenance, and their own living expenses with reduced rent collection.
Full payout eligibility is based on Adjusted Gross Income (AGI) limits from the household’s 2019 return, with the same income thresholds as the 2019 CARES Act stimulus:
- Single filers with income below $75,000
- Head of Household with income below $112,500
- Married couples filing jointly with income below $150,000
- Children qualify only if they can be claimed for the Child Tax Credit for 2020 (younger than 17)
- If an eligible taxpayer died in 2020, they could still receive a rebate applied to the final tax return
Phaseout: Every $100 in income over the threshold leads to a $5 reduction in the credit. Use this second stimulus check calculator from Kiplinger’s to estimate how much your stimulus payment could be. See the chart below for the interaction of filing status, AGI, and the number of dependents:
Rebates of the tax credit in January 2021
This round of stimulus payments is on its way. The distribution process is like that used for the CARES Act payments: by direct deposit if you are already set up for direct deposit of tax refund, and by checks or debit cards for the remainder. The stated goal is to send all payments by January 15, 2021.
Not every eligible taxpayer will get the credit now
An individual taxpayer may or may not get the rebate in advance, depending on the interaction of 2019 and 2020 income:
©Michael Kitces, www.kitces.com
Unemployment Benefits Extended
The Act also provides temporary relief to millions of Americans who are still unemployed or underemployed. So many people have lost their jobs or livelihood in the NY City region where I live, where the unemployment rate is among the highest in the country (NJ 10.2%, NY 8.3%, CT 8.2%). This is welcome news both for unemployed renters in my NYC area and nationally, and for the nearly 11 million individual investors who rely on those rents for their income.
The temporary relief includes a federal boost of $300 per week that will be added to state unemployment benefits for those receiving them, for up to an additional 11 weeks through March 14 if they remain unemployed.
The stimulus package also extends two additional unemployment programs created in the CARES Act which had been set to expire:
- The Pandemic Unemployment Assistance program, which expanded unemployment benefits to freelancers, gig workers, and self-employed people not eligible for traditional unemployment insurance benefits.
- The Pandemic Emergency Unemployment Compensation, which provides an additional 13 weeks of payments to those who have exhausted their state unemployment benefits.
More Paycheck Protection Program funding for small businesses
The original Paycheck Protection Program is refunded with at least $35 billion, with the next round of first-draw loans reopening January 11, 2021.
The legislation focuses the PPP on small businesses hit hard by the pandemic with funding so they can stay in business and keep people employed:
- Targeted to businesses impacted by the pandemic with 500 or fewer employees, including self-employed people, 1 person member LLCs, and non-profits.
- Max loan $10 million
- The program will open first – for at least two days -- for community lenders serving underserved minority, veteran, and women-owned businesses.
- To dive deep into the details, see SBA/Treasury Dept. guidance on the amended PPP program.
Businesses that received and spent their PPP loans in 2019 may reapply for a second draw (PPP2) loan:
- No more than 300 employees
- Pandemic impact is generally defined by a 25% drop in gross receipts during any 2020 quarter compared to the same quarter in 2019.
- Loan max is $2 million
- Loan amount is based on 2.5x average monthly payroll in 2019 with a max $10 million
- Foodservice and accommodations businesses can take the forgivable loan up to 3.5x monthly payroll
- To dive deep into the details, see SBA/Treasury Dept. guidance on second draw PPP loans
A longer period to qualify for loan forgiveness
According to the Small Business Administration (SBA) guidance, first time PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8 to 24 week covered period (beginning with loan disbursement):
- The business maintains employee and compensation levels;
- The loan proceeds are spent on payroll and other eligible expenses; and
- At least 60 percent of proceeds are spent on payroll costs.
PPP loans less than $150,000 will utilize a 1-page forgiveness form. The legislation states that lenders cannot require additional documentation.
Expenses paid with PPP loans are now deductible (See IRS guidance). The eligible expense definition expanded beyond the original PPP’s payroll, benefits costs, rent, most mortgage interest, and utilities to include certain operations expenses, non-insurance property damage, supplier costs, and worker protection costs against Covid-19 transmission in the workplace.
Contact your lender now
If you missed out on a PPP loan during the first round but think your business qualifies now, apply quickly. Funding is expected to run out. Contact your lender now to indicate interest and begin preparing financials for the loan application.
Healthcare and Dependent Care FSA funds – More Flexibility
If you have unused funds in your Healthcare Flexible Spending Account (FSA) or Dependent Care Flexible Spending Account (DCFSA) you may have been scrambling in 2020 to try and spend them all before year’s end or risk losing them. Relief is in sight.
Employers are now permitted to modify the benefit plan to allow employees to roll over any remaining funds (regardless of amount) into 2021, and then 2022. If your employer implements this (and I would expect that most FSA plans will do this), you have a longer time to use those funds. Employees may also be permitted to change their FSA and DCFSA contribution amounts for any reason during the year.
Employers also have the option to amend the plan to extend the grace period for using annual FSA contributions to 12 months following the end of the plan year (up from the current 2 ½ months). Employers may also raise the age of eligibility for DCFSA spending from 13 to 14. That is good news for 2021 after-school programs and camps for your young teenager!
Education and Student Loans
If you are in school or have outstanding student loans, there is a glimmer of hope. Employers can now give employees $5,250 per year in tax-free student loan payments through 2025. The benefit is meant for companies with many employees (not self-employed, small business owners). No more than 5 percent of education assistance can go to the business’s shareholders, spouse, or dependents.
There are new phaseouts for education credits: The phaseout for both the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLTC) is ($80,000 single/$160,000 married). This replaces the above-the-line deduction for qualified tuition and related expenses.
The FAFSA (Federal Application For Student Aid) will be simpler, with fewer questions, effective July 2023. The “Expected Family Contribution (EFC)” will be renamed the “Student Aid Index.”
Extension of Qualified Charitable Deductions Through 2021
The legislation extended the $300 individual charitable deduction for tax filers who do not itemize and increased the amount those married filing jointly can deduct to $600 for the 2021 return. This is an “above the line” deduction, meaning it directly reduces your gross income if it applies to you.
The cash contribution must go directly to a 501(c)(3) charity. Donor-advised funds are not included. The election is made per contribution, so if you make more than $300 single/$600 married in contributions you will have to select those to deduct above the line.
Other useful extensions
If you are paying mortgage insurance on your primary residence, you may continue to treat the premiums as qualified residence interest through 2021. This may be particularly helpful for house hackers in multi-family properties who have lower down payment mortgages such as FHA loans.
The $500 lifetime energy credit on your principal residence is extended through 2024.
Thinking of buying an electric car? The Electric Vehicle credit was extended through 2021.
Does the stimulus relief go far enough?
For rental property owners, there is a lot to like in this legislation. However, rent insecurity is on the rise. The National Multifamily Housing Council (NMHC) Rent Payment Tracker found 76.6 percent of apartment households made a full or partial rent payment by January 6. One research estimate found that the range of renter households at risk of eviction was nearly 7 million with a total rent shortfall of at least $10.7 billion. Rent paid is the landlord’s income – an unpaid rent means the small income property owner may struggle to pay their own bills. In the long run, I suspect a more targeted approach that helps struggling tenants and owners will be needed to meet the pending eviction crisis.
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