President Biden’s tax plan could be a triple threat to the real estate market as well as to investors. Biden’s tax plan would hit both residential and commercial real estate because of three big tax changes. On one hand, the wealthy are busy trying to anticipate Biden’s tax increases and on the other, clients are flooding financial advisors with calls trying to predict which of President Biden’s tax proposals might become law. Now that the coronavirus relief package has become law, President Joe Biden is eyeing the government’s first major federal tax hike since 1993 aimed at funding the long-term recovery programs.
First would be the elimination of the so-called 1021 exchange that allows property investors to roll their gains from one investment property or the sale of one property into another without having to pay any capital gains tax. Under Biden’s tax plan, they would owe a capital gains tax that leads to the second major change, which entails that the capital gains tax would jump from 20% to 39,6% and would apply to the sale of real estate for those making more than a million dollars in one year.
Finally, there’s the elimination of the step-up in basis that would hit inherited property. This means that when inheriting any property, you would be liable to pay a capital gains tax on the gain even if you don’t sell it. However, this would only apply if your gain or income for that year amounts to over a million dollars.
The real estate industry can already be seen juggling with these changes and are already out in force to fight these measures. A letter was addressed to Treasury Secretary- Janet Yellen by the National Association of Realtors saying, “…these proposals would reduce growth, shrink affordable housing and penalize many hardworking and enterprising Americans who have spent their lives saving and building equity in their property.”
Consequently, these changes have drawn great criticism in areas that will highly disadvantage certain groups of people. For example, it would be highly unfair for those families that have owned properties that have largely increased in value over generations to pay the highly increased value of tax that is being introduced.
In brief conclusion, due to the only congress having the power to tax and spend, Biden’s tax plan will require congressional approval before it can become law. Therefore, only time will tell whether or not these law changes play out their part in the distant future.