Guest article by Alina Trigub
While the drama over the next presidency plays out, some of you who invest in real estate are probably worried or at least curious about Biden’s proposed tax changes.
In a nutshell, according to Biden’s tax plan, several components of Trump’s Tax and Jobs Act may be eliminated, which would mean that the tax benefits applied to real estate investors will either be removed or reduced. Should Biden’s plan be implemented, real estate investors can likely expect the following changes:
1. Increase in Taxes for Wealthier Americans
In order to help close the income gap between high- and low earners, Biden’s plan will raise the tax rate from 37% to 39.6% for earners making over $400,000. Since accredited investors earn over $300,000 as a family, this will likely impact at least some investors.
2. Raise capital gain tax
Long term capital tax rate may be raised from a maximum of 20% today to a maximum of 39.6% for individuals earning over $1M a year.
3. Abolish the Step-up Basis Law
First, let’s go over an example of the step-up basis law entails. According to the current tax code, if parents, that passed on, willed their house to their children, and this residence is valued at $350k, it doesn’t really matter that they bought 30 years ago for $50k, because based on the step-up basis law, the inherited house is valued at $350k for tax purposes. Therefore, if this house was later sold for $450k, then capital gain is $100k. However, based on Biden’s proposal, if the step-up basis law is abolished, the basis will be equal to parents’ basis of $50k, and hence if the house is sold for $450k, then capital gain will be $400k and it most likely will be taxed at a higher rate.
4. Phase out Qualified Business Income (QBI)
Biden’s tax proposal will phase out Section 199A deduction also known as QBI for individual whose real estate investment income is above $400k. This deduction actually applies not only to real estate investors; it is also applicable to business owners allowing them to deduct up to 20% of their QBI.
5. Eradicate 1031 Exchange
1031 Exchange is a common strategy that allows to postpone paying taxes. Biden’s tax law may potentially eliminate it.
6. End Bonus Depreciation
Bonus depreciation allows investors to take a larger upfront deduction on various improvements for real estate instead of spreading it over a longer period of time. This may go away as well.
7. Increase the Corporate Income Tax Rate from 21% to 28%
This proposed change equally applies to real estate investors and corporations.
8. Lower the tax-free gift amount transfer
Biden’s tax proposal intends to lower the amount that can be transferred as a gift tax-free from $11.58M to $3.5M and $1M in lifetime gifts.
While Joe Biden likely had won the election, there is still no guarantee his tax plan will become effective in this way, shape or form. These changes will have to go through the legislative process in the House and the Senate. The article is written to give readers awareness of Biden’s proposal.