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May 23, 2024 | read

145. Biden’s Proposed Tax Changes and How They Might Cause Real Estate Investors to Pay More Taxes

Ben Isley

We’re releasing this session previously recorded live from Brandon and Thomas while they’re in Denver – we have gotten many questions about the proposed Biden tax law changes and wanted to address them!

It’s important to note that these changes are currently being discussed and negotiated in Congress – we don’t have a formal bill yet, but we’re expecting one in June/July 2021. We will keep you updated on the proposed changes and new updates!

The first big change is to the capital gains tax rate. For those with an AGI in excess of $1MM, the proposed capital gains rate is 39.6%. That’s another 19.6% on long-term capital gains. Adding in the Net Investment Income Tax and state tax can push come wealthy individuals over a 50% tax rate.

How do you avoid this? Well, you’d hold assets forever until you die… However, the Biden administration has a provision to eliminate the step-up basis for any assets passed on with a gain in excess $1MM.

It’s most likely that both of these pieces will be passed together. They work in unison because taxpayers would just hold assets forever without the elimination of the step-up basis.

Estate planning will become much more important. The Biden administration has also proposed to increase the estate tax rate from 40% to 45%. The Biden administration does not want people hiding assets in trusts to avoid the capital gains and stepped-up basis provisions.

The [1031 exchange] proposal is that you cannot defer gain in excess of $500K, and this may or may not include depreciation recapture… you can still 1031 exchange property that has gain of less than $500K, but the proposal would make a portion of your gain taxable immediately.

This would certainly hurt the real estate industry and the 1031 exchange industry. The 1031 exchange industry could potentially lose many jobs, the industry would consolidate as they’d handle less transactions.

1031 tax code comes up in every administration, and they have been changed before, and they’ll probably be changed again!

If this did come to fruition if you don’t have 1031 exchange, and you have an increased capital gains tax, people will be incentivized to hold on to their properties longer. This means less transactions in the marketplace and less supply in the market. Assuming the demand stayed constant, this would be upward pressure on prices… If interest rates get increased, there could be a decrease in demand for real estate, which might counter this.

If these current tax changes pass, this could limit the supply of real estate on the market.

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