Ten Tax Changes For Real Estate Under Biden’s Tax Plan

The following was posted on a local FB group. I wanted to note this here for reference and also to spread some information on what could potentially occur under Biden’s Tax Plan.
I’m neither for nor against his plan. I’m not a real estate investor myself so I have no skin in the game. This is to spread awareness so that RE investors can mentally prepare for what’s to come.

1. Elimination of bonus depreciation

A tax incentive (part of the TCJA) that allows a business or real estate investors to immediately deduct a large percentage of the purchase price of eligible assets, rather than write them off over the “useful life” of that asset. For example, real property improvements (like landscaping) have a depreciation period of 15 years and qualify for bonus depreciation. If you spend $10,000 on landscaping improvements for a rental property, you can use bonus depreciation to deduct the entire cost in the year you spend the money. Other items that may qualify for bonus depreciation include the purchase of furniture, appliances, and other real estate property improvements

2. Eliminate 1031 Exchanges

A 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. Most people don’t buy their “forever” home the first time. A lot will buy a shitty house first and gradually upgrade to a better one after a few years of working, saving, and investing. The 1031 rule lets people defer the profit gained from selling their first home.

3, Raise long-term capital gains tax rates for high-income earners

Long-term capital gains tax would increase for those earning over one million dollars a year (taxed at regular earned income rates rather than long-term capital gains rates). As it stands right now, the top tax bracket for long-term capital gains is 23.8% if you include the (NITT) “net investment income tax” of 3.8% which is applicable to high-income earners. Biden has proposed raising the long-term capital gains tax brackets to 43.4% for those earning over one million dollars per year.

4. Eliminate the step-up basis.

This is essentially a “death tax”. Let’s say your parents bought a house in 1970 and paid $50,000 for it, and today the house is worth $500,000. If your parents were to pass away and leave you the sole beneficiary of the house, there is a step-up basis law in place which allows the original cost basis ($50,000) to “step-up” to today’s full fair market value for tax purposes ($500,000). If you were to sell the house the next day for $500,000, there would be no tax due on the $450,000 “gain”. Under Biden’s tax proposal, this step-up basis would be eliminated, and therefore, you would be responsible for the tax due on the $450,000 “gain”.

5. Implement a $15,000 first-time homebuyer tax credit.

In 2008, the Housing and Economic Recovery Act sought to encourage Americans to purchase homes by creating a tax credit worth up to $7,500 for first-time buyers. The next year, Congress increased the amount to $8,000. The purpose was to encourage homeownership and stimulate the US housing market during The Great Recession. Biden has proposed a similar plan, but would nearly double the tax credit amount. This time, the purpose would be to allow affordability and accessibility to first-time homebuyers rather than stimulate the housing market.

6. Phase out QBI (Qualified Business Income Deduction) for income earners making over $400,000

QBI allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. This could affect a large number of real estate projects and businesses.

7. Reduce the estate tax exemption from $11.18 million to $5 million

The Tax Cuts and Jobs Act doubled the estate tax exemption to $11.18 million for individuals and $22.36 million for married couples. This means a person can pass away with $11.18 million dollars in assets and not have an estate tax due; Biden has proposed that this be reduced to 5 million dollars. This would largely affect owned assets including real estate and businesses.

8. Raise corporate tax rates to 28% from the current 21% level

Starting in 2018, the tax law radically cut the corporate tax rate paid by C corporations from 35% to 21%. There is also a proposed 15% minimum tax for corporations with profits of $100 million or higher. This minimum tax is structured as an alternative minimum tax; corporations would pay the greater of their regular corporate income tax or the 15 percent minimum tax. Note, net operating loss (NOL) and foreign tax credits would still apply. This change would primarily affect publicly traded companies, but also some real estate businesses.

9. Raise the top federal income tax bracket back to 39.6% from 37%.

This would affect income earners who earn over $400,000 per year. Though this is not directly tied to real estate, many accredited real estate investors are high-income earners and could be affected by this change.

10. Social Security tax increase for high income earners.

As it stands today, the 12.4% Social Security tax stops kicking in once you earn more than $137,700 per year. The Biden proposal would have this tax kick back in for any income earned over $400,000. Though this is not directly tied to real estate, many accredited real estate investors are high-income earners and could be affected by this change.”

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