Biden’s proposed tax hikes a ‘double-edged sword’ for real estate - What investors and homeowners need to know.
Kevin Brunner
I help people turn capital gains taxes from large asset sales into income. Contact me before selling real estate, a business, or other highly appreciated asset!
Biden’s proposed tax hikes a ‘double-edged sword’ for real estate. What investors and homeowners need to know.
Wednesday, May 12th 2021, Orange, California
Biden’s proposed tax changes could cause Americans much-reduced returns on property sales.
As a follow-up to his $2.3 trillion infrastructure package, Biden has rolled out a $1.8 trillion plan to address other priorities including education and child care, although most of that money will go to other things, basically PORK.
To pay for the plan (aka pork), the Biden has proposed increasing taxes on 'wealthy Americans', describing its tax package as one that “rewards work — not wealth.” Clearly, they have no idea what creates wealth.
Biden’s tax agenda will not only reverse the biggest 2017 tax reforms. The White House said in a fact sheet describing the American Families Plan. “ this changes to the tax code so that the ‘wealthy' have to play by the same rules as everyone else. ... these reforms will also rein in the ways that the tax code widens racial disparities in income and wealth.” So, it’s wealth redistribution, plain and simple.
The focus on 'wealthier Americans' means that most households will not be directly affected by the proposed changes. But business owners (job creators) and real estate investors will be hit hard.
“Some have speculated that this will hit middle-class home sellers who sell a home in an expensive market and have more than $1 million of capital gains from real estate, but this is very rare,” said Taylor Marr, senior economist at real-estate brokerage Redfin. “Even in markets where home prices are over $1 million, most of that is still serviced by debt, not all equity.”
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Regardless of this new law, you can Defer Capital Gains, forever if you choose. See this informational video at TaxFreeYou.com
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Nevertheless, some of the proposed changes to the tax code will have a serious impact on real estate. Here’s what investors and homeowners need to watch out for:
Real Estate
Biden has proposed hiking the tax rate on capital gains for households making over $1 million. And if you are selling an investment property, that could likely be you. The White House proposes raising the rate to 39.6%, up from 20% where it currently stands.
Now the heirs may have to sell the property they inherit, to pay the taxes on the property they'll no longer own.
Additionally, the Biden administration has called for ending the ability to “step up” the cost basis for real-estate when it is inherited. The stepping up allows heirs to calculate capital gains on the sale of a home or other property using the market value at the time they inherited it, rather than when it was originally purchased. Stepping-up the basis can reduce the tax burden for heirs considerably in these circumstances, but no longer with Biden’s plan.
Finally, Biden is calling on Congress to eliminate a tax rule for real-estate investors, called a Section 1031 exchange. Under this tax rule, if owners of investment and business properties use the proceeds of the sale of one property to purchase another property within 180 days, then they can forgo paying capital gains and depreciation recapture taxes. The Biden plan would eliminate the ability to do this when capital gains are greater than $500,000.
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Regardless of this new law, you can Defer Capital Gains, forever if you choose.
See this informational video at TaxFreeYou.com
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The capital-gains rate hike ‘a double-edged sword’
By design, the increase in the capital gains tax rate won’t directly affect most Americans. But among those it does affect, it could prompt two conflicting results, economists say.
“The current proposal to increase the capital gains tax may impact a broader segment of Americans than initially anticipated,” said George Ratiu, senior economist at Realtor.com. And that has a lot to do with the state of the housing market right now.
Many homeowners among the Silent and Baby Boom generations purchased their properties decades ago when prices were “reflecting a different economic environment,” Ratiu said. Today’s housing market is defined by strong demand — driven mainly by millennials and low-interest rates — and low supply as a result of decades of under-building. Home prices are rising at a record pace consequently, increasing the likelihood that a homeowner who bought their home years ago could see significant capital gains should they sell.
"The current proposal to increase the capital gains tax may impact a broader segment of Americans than initially anticipated.” George Ratiu, senior economist at Realtor.com 'The proceeds of selling a home on top of these homeowners’ other income “could push more of them into the $1 million-plus bracket, leading to a noticeable loss in appreciation if the current proposal were enacted,” Ratiu said.
Should that happen, homeowners will likely respond in one of two ways, said Ralph McLaughlin, chief economist and senior vice president of analytics at real-estate finance company Haus.
“It’s a double-edged sword,” McLaughlin said. “For those that were thinking about selling in the next few years, the policy may entice them to sell their investment properties sooner.”
"That could pump some much-needed supply into the housing market at a time when buyers are struggling to find any homes to buy. But it could have the opposite effect in the longer term", McLaughlin warned.
“I fear the policy may lock in investors for a much longer period of time than with the current rate, and thus be counter-productive in helping free up investor inventory,” McLaughlin said.
Alternatively, the higher tax rate will cause wealthier Americans to re-evaluate where to park their money.
Eliminating the 1031 exchange could lower property prices and values
The 1031 exchange “has been a cornerstone of commercial real-estate investments,” Ratiu said. A 2020 report from the National Association of Realtors found that 12% of sales transactions involved a like-kind exchange between 2016 and 2019.
By and large, the beneficiaries of these policies were small investors, the report noted. Nearly half (47%) of the properties involved were held by investors in sole proprietorships, while 37% were owned by S-corporations.
Around 84% of properties involved in 1031 exchanges were owned by small investors, according to data from the National Association of Realtors.
“Eliminating this provision would likely lead to a downward adjustment in property prices,” Ratiu said, adding that investors may hold onto properties for longer as result. Residential real estate markets would be impacted. More than half of the properties involved in 1031 exchanges were residential properties, including single-family rental homes, apartment buildings, and condominium units.
So much for ’taxing only the wealthy'. Rents will rise, returns in 401k and pensions will be hit, this will affect everyone regardless of their wealth status.
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You can Defer Capital Gains, forever if you choose.
See this informational video at TaxFreeYou.com
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#TaxFreeYou
Kevin Brunner
Qualified Financial - (800) 694-5133
CIRCULAR 230 DISCLAIMER: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Articles and quotes referenced are from whitehouse.gov, MarketWatch.com, Realtor.com, RedFin.com, as well as others.
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