The Biden Tax Plan – 8 Changes for Real Estate Investors

The election is over and we have a new president-elect. But with a new administration comes new policy changes!

We’re going to talk about how Joe Biden’s tax plan could affect the way you invest in real estate. You can also check out the video I made about this topic.

In general, his plan will repeal the major tax changes that Trump added over the past 4 years that favored wealthy individuals and corporations.

While he plans on changing a lot, we’re going to be focusing on the changes that affect real estate investors and high-income earners.

Removing the Ability To Do 1031 Exchanges

Biden has mentioned that he plans to remove the ability to do 1031 exchanges. This would be a huge blow to the real estate investing community since the 1031 exchange is one of the main reasons why investing in real estate is so good.

The 1031 exchange allows you to defer paying your capital gains taxes as long as you’re purchasing a like-kind investment. So say you bought an investment for $100K and it’s now appreciated to $300K. If you sold the home, you would have to pay the taxes on your $200K profit, which could be around $30,000, leaving you with $270K (assuming no closing costs).

But with the 1031 exchange, you can use the $30,000 to help you buy your next investment, and now you’re able to buy a $300,000 home instead of a $270,000. This benefit will allow you to buy larger assets and build more wealth over time. If you want to learn more about the 1031 exchange, you can check out my video about 1031 Exchanges here.

Eliminate the Step-up In Basis for Capital Gains Taxation

Biden also talked about eliminating the step-up in basis for capital gains taxation. That’s when the basis gets stepped up when you pass on your property to your heirs.
As an example, imaging buying a house for $100k that’s now worth $500K. If you were to sell it before you pass away, then you would have to pay taxes on your $400K profit. But if you passed away the basis would get stepped up on the day you die, and if your heirs sold it for $500K, they wouldn’t have to pay any capital gains taxes on it.

This is a HUGE change and a major con for real estate investors. One of the most common and profitable real estate strategies is to buy, 1031 exchange, and die. This lets them take advantage of buying properties, using the 1031 exchange to roll over their wealth into larger and more profitable assets, then die to pass on that wealth to their heirs tax-free and create generational wealth.

The 1031 exchange and the step-up in basis are two HUGE reasons why people prefer to invest in real estate over other investment vehicles. If you take them away, then investors may decide to invest elsewhere, which could cause a crash in the housing market.

Removal of bonus depreciation

Another proposed change is the removal of bonus depreciation. This let you depreciate a large percentage of the purchase price of eligible assets rather than writing them off over the useful life of that asset.

$15,000 Credit to First-time Homebuyers

Biden also plans to provide a $15,000 homebuyer credit to first-time homebuyers. This would help affordability and accessibility to first-time homebuyers.

As of this recording, the market is still very hot and I think it’ll just raise prices by 15K. But it’s still pretty nice since it’ll help with liquidity once they get their tax refunds.

Reduce the estate tax exemption from $11.7M to $5M

The estate tax exemption is also known as an inheritance tax. If you pass away and your assets are valued under the estate tax exemption, then you didn’t have to pay taxes on them.

Over the past few years, Trump increased the limit to 11.18 million per person or 22.36 million for married couples. Now Biden is planning on reverting it back to 5 million per person or 10 million per couple.

This greatly affects wealthy families who have a lot of owned assets including real estate and businesses and may cause families with large portfolios to sell their properties because of heavy tax burden that comes when they get inherited.

Raise the Top Federal Income Tax Bracket Back to 39.6% for Taxable Incomes Above $400K

For high-income earners, the first proposed change is to raise the top federal income tax bracket back to 39.6% from 37% for taxable incomes above $400,000. This affects home flippers who earn active income from their investment projects.

Raise Long Term Capital Gains for High-income Earners

Another proposed change is to raise long term capital gains for high-income earners. Biden plans on taxing the long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6 percent on income above $1 million. Currently, the maximum amount that an individual would pay in capital gains tax is 20% if they earned over $461,700.

This new policy would almost double the amount for high net worth individuals and may shift the way they invest since they’ll no longer get the benefit of holding assets for a long period of time. We’ll see how this changes the economic environment over the next few years.

High-income Earners Starts Paying Social Security Taxes

High-income earners will also start paying social security taxes. Right now, individuals pay 12.4% in social security taxes up until they earn more than $137,700 per year. With Biden’s new plan, high-income earners will continue to pay the 12.4% once their income exceeds $400,000 in any given year.

Conclusion

According to conservative estimates, Biden’s tax plan would lead to about 7.7 percent less after-tax income for the top 1 percent of taxpayers and about a 1.9 percent decline in after-tax income for all taxpayers on average by 2030. And we can only hope that the increased taxes will be spent wisely by our Government.

So what are your thoughts on Joe Biden’s proposed tax changes and which one do you think will affect you the most? Let me know down in the comments section.