What’s Ahead for Real Estate Owners with Biden’s Tax Reform?

What’s Ahead for Real Estate Owners with Biden’s Tax Reform?

The next few months in the Capitol could shape the economic health of U.S. households for years to come. Biden’s Build Back Better Act (BBB), the $1.75 trillion investment in social and climate programs, bumped and bounced its way to House approval before hitting a wall in the Senate in December.[i]  However, Congress will have to pass a government funding bill by mid-February to prevent a potential government shutdown.[ii]

What’s (Currently) In and Out?

There are several income and real estate-related changes in the House-passed bill that could impact individual investors, though far fewer than were in the original draft of the legislation.[iii]

One of the real estate-related programs included in the House bill is $150 billion in funding to increase housing affordability by incentivizing the building of new rental and single-family homes and providing rental and down payment assistance.[iv]

The House-passed bill also includes $1.5 trillion in tax increases on businesses and individuals. Here is a look at what’s in and what’s out of the bill the House passed when it comes to tax provisions[v]:

Proposal IN or OUT? Comments
Individual income tax rates OUT The original House bill proposed increasing the top rate from 37% to 39.6% for individuals over $400,000 in income, but the proposal was dropped from the version of the BBB that was approved by the House.
Capital gains OUT The original House bill proposed a new top rate on capital gains and dividends of 25% for individuals with more than $400,000 in income, but the proposal was dropped from the version passed by the House.
Estate tax OUT Earlier in 2021, there were proposals to either end the step-up in basis or reduce the amount of inherited assets that would be subject to the tax. In the end, no changes to the estate tax were included in the bill.
Net Investment Income Tax IN Under current law, the 3.8% net investment income tax does not generally apply to flow-through income from an S corporation, limited partners, and LLC members if the taxpayer individual is actively involved in the business.

Under the House-passed version, for taxpayers with taxable income over $400,000 (single filers), $500,000 (married taxpayers filing jointly or surviving spouses), this 3.8% tax would apply in most cases to income tax and is treated as a net investment income.

1031 Exchange Restrictions OUT Earlier in 2021, there were proposals to make changes to the tax-deferred exchanges allowed under Section 1031 of the tax code. More details are provided below on why this is important for real estate owners.
State and Local Tax (SALT) deduction IN The $10,000 cap on the deduction for state and local taxes was imposed in 2017. The House-passed BBB increases the exemption amount to $80,000 through 2030. However, the Senate is widely expected to change the provision.

 

Retroactive Tax Changes?  Maybe…

Many of the provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that currently are scheduled to change or expire in the coming years are addressed in the budget reconciliation package and, as a result, may change or expire earlier than previously provided.[vi]

In some cases, like the proposed (but likely moot) capital gains tax increases, the Biden administration wanted the increase tied to its announcement date in 2021.[vii]  While some may believe increases that make their way into the final bill will ultimately take effect after enactment, it certainly leaves some question marks for taxpayers trying to plan for and complete their 2021 taxes.

Additionally, some of the biggest taxes in the bill were set to kick in on Jan. 1, 2022, under the bill.[viii]  And now that passage is delayed, those could also trigger retroactive tax increases to make misery on top of misery.

1031 Exchanges: Safe… for Now

For the past year, some in the real estate investment community has feared that the 1031 Tax Deferred Exchange could be on the chopping block because Biden had proposed ending 1031 exchanges to help fund his proposed childcare and family-leave legislation.[ix]

Tax-deferred exchanges, as defined in Section 1031 of the Internal Revenue Code, allows a property owner to sell their investment property and defer the taxes that would normally be due upon that sale.

Doing away with the 1031 Exchange system could affect a large number of small “mom and pop” investors who bought investment properties as a way to build wealth for their families. If the exchange option were eliminated, then any appreciation in the value of the investment property would have been taxed upon a sale. There would be no way of further deferring those taxes through the 1031 exchange process. This would cause the number of sales each year to drop as well as the value of properties as demand for investment properties could be reduced.

We are pleased to report that neither the House-passed version of the BBB nor Senator Wyden’s tax related text of the Senate version includes any limitations to IRC Section 1031.[x]  Although 1031 appears to have been left as is, that could change if congressional wrangling sends the bill back to the House for another round of approval, opening the door for more changes.

For more information about passive real estate investments, please call 1031 Capital Solutions at 1-800-445-5908 or visit our website, 1031capitalsolutions.com.

_____________________

This is for informational purposes only, does not constitute as investment advice, and is not legal or tax advice. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. Please consult the appropriate professional regarding your individual circumstance.

This material is not to be interpreted as tax or legal advice. IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax concepts, therefore you should consult your legal or tax professional regarding the specifics of your particular situation.

 Investments in securities involve a high degree of risk and should only be considered by investors who can withstand the loss of their investment. Prospective investors should carefully review the “Risk Factors” section of any prospectus, private placement memorandum or offering circular.

The data contained in this material was obtained from third-party sources believed to be reliable; however 1031 Capital Solutions, CIS, and CAM do not guarantee the accuracy of the information.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC-registered investment adviser. 1031 Capital Solutions is independent of CIS and CAM.

 

[i] Time, as of 11.19.21

[ii] New York Times, as of 12.02.21

[iii] Schwab, as of 11.22.21

[iv] Time, as of 11.19.21

[v] Schwab, as of 11.22.21

[vi] HCVT, as of 06.07.21

[vii] CNBC, as of 06.02.21

[viii] Roll Call, as of 12.23.21

[ix] GlobeSt, as of 08.31.21

[x] IPXExchange, as of 12.14.21

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