How Real Estate Investors Will Benefit from Biden Tax Plan

Biden aims to end real estate investment tax break

The 1031 tax break has been in the US tax code since 1921. It provides tax breaks for real estate investors, allowing them to buy and sell properties while deferring and saving on their capital gain taxes. Biden’s new economic plan calls for the abolishment of this tax break.

Joe Biden’s new plan includes abolishing the right to defer some tax payments on property investment gains above $500,000. This is part of Biden’s effort to raise taxes to pay for the expansion of government and services, including paying for free preschool to those who cannot afford it themselves.

The Trump-era benefit allows property investors to roll the gains from real estate sales into future investments while deferring the tax on capital gains. The deferral process can be extended for a long time, and sometimes it can be canceled if the investor dies.

For investors, this was a windfall that would have saved them an estimated $41.4 billion in taxes between 2020 and 2024. Some say that Biden’s tax hike would hurt property investors exclusively, including those invested in residential real estate – large and small investors. The 1031 exchange tax break excluded investments in industrial equipment since 2017.

The biggest beneficiaries of the current rules are individual investors. JCT figures for 2021 show a benefit from these rules for corporations of $2.3 billion, while it shows tax breaks for individual investors of $5.7 billion.

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Case Study

Mike bought two condos in Jersey City for $72,000 each in 2019. He sold one in 2019 for $250,000 and ne in 2020 for $250,000. After refinancing charges, he netted $140,000 on each sale.

These deals would not have been possible without the current tax breaks. It is also unlikely that these benefits can be tweaked. For Mike, it was the best way to build equity. Mike strongly disagrees with those that frame 1031 exchanges as a tax loophole for the rich.

Biden’s entire proposal, called the American Families Plan, includes the cancelation of more tax breaks. Among others, there is a proposal to end private equity’s most important tax break. At the moment, compensation from carried interest is treated as capital gains and taxed lower than wages at the top marginal income tax rate. This break often comes into play during property projects and can add to millions of dollars for some investment managers.

The 1031 tax break has been part of the US tax code in some form or other since the 1920s. It originated to cover situations where farmers exchanged livestock and is vital for small enterprises because it allows them to upgrade facilities without facing hefty bills. Academics like David C.Ling and Petrova say removing the tax break would have negative ramifications like the reduction of liquidity in the market because holding periods will increase. They also say that real-estate investments would decrease, property prices would fall, and rents would rise over the long term.

The political left argues that the tax break benefits only those who invest in real estate and provide no benefit to middle-class families who do not own any assets apart from family homes and 401(k)s. The left-leaning Institute of Taxation and Economic Policy says that the tax break was meant to benefit small-scale transactions. It no longer does and now supports brokers who use qualifying properties merely to insert into their deals. To support their thesis, they use a 2019 paper that purported to show how a trade of Midwestern farmland for a Florida apartment can be considered a like-kind exchange.

The political obstacles ahead

The Republicans will not back the bill, and the Democrats have a narrow majority at the moment. The vote on this bill will be tight. The above proposals are mere footnotes in a plan that includes a legion of new social spending plans, from paid medical leave to free college for all. On the Democratic side, the left wants more, including more health care benefits. On the other hand, many states, especially the high-income states, are already concerned about some of the proposed tax increases.

No date has been set for the vote to occur, and even if the ballot passes congress, there is no indication of when it all would begin. Fortunately, tax changes are typically grandfathered in and never apply retrospectively.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intended for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

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