President Joe Biden has called on Congress to raise taxes on some real estate investors to help fund the $1.8 trillion American Families plan. This is a non-partisan overview of Biden’s real estate tax plan proposal and potential impacts on 1031 tax deferred exchanges.
PLEASE NOTE: This overview is intended to be factual and non-partisan in the presentation of information. Regardless of what side of the aisle is supported, changes are coming and they are going to affect the entire country. Our goal is to help our clients adapt to the changing times and find success in their real estate and business endeavors.
Present tax breaks allow for investors to defer paying taxes on real estate by rolling their profits into their next property investment within 180 days. This process is called a like-kind or 1031 exchange. Theoretically, if an investor buys and sells tax-deferred real estate throughout their life and holds a property until death, they can pass it on to their heirs tax-free.
Under Biden’s proposed plan, investors could no longer defer taxes on property gains over $500,000. Also tied into this proposal is a call for an increase in capital gains taxes for households who make more than $1 million per year. The rate in this bracket would jump to 39.6% from 20%.
Who could this affect?
About 12% of real estate sales were part of a 1031 exchange from 2016 to 2019, according to a 2020 survey from the National Association of Realtors. The survey showed 84% of 1031 exchanges were by investors in sole proprietorships (47%) or S corporations (37%). Sixty-eight percent of those surveyed expect rent increases if this change occurs; these might be enacted by landlords hoping to recoup losses or extra taxes by charging higher rents.
What is the American Families Plan, which Biden proposes to fund with this property tax plan?
Biden’s proposed American Families Plan, an extension of his American Jobs Plan, plans to provide:
Universal preschool for 3- and 4-year-olds
Two years of community college and lower-cost college for low- and-middle income students
Improved teacher training and support
Limited childcare costs for low- and middle-class families, who would be capped at paying no more than 7% of their income on childcare
National paid family and medical leave program
Nutrition assistance nationwide
Several tax cuts for lower- and middle-income families
Extended health insurance tax credits
There’s no date set yet as to when the rules will change if Biden’s real estate tax plan proposal is passed by Congress. Some investors are starting to plan ahead for changes by talking to estate planning attorneys and accountants. If you’d like to have a free call with us to discuss this tax plan proposal and share thoughts on how it could affect the local real estate market, please contact us at 828-782-5582 or firstname.lastname@example.org.