Potential Tax Legislation
Hello. I’m Brandon Karr with Marcus & Millichap. I lead the Karr Self-Storage Team in our Fort Worth, TX office and in our latest ‘Ask the Broker’ video, we wanted to talk a little bit about how potential tax legislation being proposed by the Biden Administration could impact real estate investors.
Build Back Better Program
Less than two months after his inauguration, President Joe Biden moved significantly forward on key elements of his Build Back Better program, which would be funded by notable changes in tax law. Of course, all the changes – except those that already passed as part of the American Rescue plan – would need to be enacted by Congress in order to become law, and any of the provisions discussed here could be revised or eliminated. But with Democratic victories in the Georgia Senate run-off races, the Administration now has political capital that can be leveraged in order to get legislation passed – as both Congressional tax-writing committees are now chaired by Democrats.
The proposed American Families Plan is estimated to cost $1.8 trillion and would provide some Americans with free education, support paid family and medical leave, extend Affordable Care Act subsidies, and institute a variety of other social programs. The proposal would be funded in part by increasing the top individual federal income tax rate from 37% to 39.6%. Additionally, the top rate on long term capital gains would almost double from 23.8% to 43.4% for taxpayers whose incomes exceed $1,000,000 annually. The American Families Plan also includes additional tax proposals to counter “loopholes” that the Administration believes benefits higher-income taxpayers. The plan would repeal the ‘step up basis’ rule that enables families to pass property down from one generation to another without ever paying any tax on the increases in the property’s value over time. Additionally, the plan would also close the “carried interest” loophole that the Administration believes private equity partners, hedge fund managers, and other investment partnerships exploit to avoid paying ordinary income tax rates when they divest of their partnership interests.
The plan would limit the present tax break for those who use the 1031 like-kind exchange platform that allows real estate investors to defer taxation when they exchange real property. Alarmingly, the opportunity to defer taxation would end for capital gains in excess of only $500,000. With all this in mind, clearly, if the Biden Administration is able to pass the proposed legislation through Congress, it will have a sweeping impact on real estate investors and taxpayers at every level – not just the top 1%. We encourage you to factor these potentialities into the equation as you evaluate your real estate investment strategy. The Karr Self-Storage Team prides itself on helping investors of all sizes determine the appropriate strategic course based on their goals and objectives and whether that be buying, selling, refinancing, or holding – we invite you to call us personally to discuss.