Photo Credit: Tejeda Law GroupProperty owners, both residential and commercial, are buzzing about Biden’s emerging tax plan. The proposition hopes to fund the 1.8 trillion-dollar American Families Plan, focusing on education and childcare—with a direct aim at taxing wealthy real estate investors. The target goal is leveling the playing field for big, upscale proprietors who have avoided even bigger tax rates than your average buyer. Fair enough? Some would argue to think again. The proposal could affect more middle-class Americans than expected as home values have skyrocketed in recent years. However you feel about the plan, there are a few elements within it to consider:
- End of the 1031 Exchange
A 1031 or “like-kind” exchange dates back to1921 and a century later, it’s finally getting a remake. In this exchange, a real estate owner can use the profit of one property to buy another similar (like-kind) property and avoid the capital gains tax. Under the new plan, this would mean a strict crackdown on any profits more than $500,000. This margin might stop corporations who sweep in, buy up entire streets and apartment complexes, and take the tax break as an advantage. However, the concern stands with single-family homeowners—most of whom bought their homes decades ago at lower prices. Appreciation, meaning the increase in the value of a property over time, is hitting a nerve with urban and coastal homeowners who might be eager to sell and buy another property before the plan takes place. (As with any real estate investment, don’t make a knee-jerk reaction to sell and/or buy.)
- Step Down to the “Step-Up Basis”
Under the step-up basis, any real estate, stocks, or assets passed down from the deceased to the heir(s) are not linked to a capital gains tax. No taxes are paid on death. The value of the home or asset is also regulated or “stepped up” to the higher market value at the time of the inheritance (instead of the original purchase price). Ending the step-up would mean heirs would now pay for appreciated gain on the property if worth more than $1 million. This poses a similar issue to the tax-break loophole mentioned above: a lot of homes and commercial properties these days are easily worth $1 million! Under this plan, though, Biden adds that family-owned businesses and farms would not pay capital gains taxes if heirs continue to run the business. (This would alleviate the worries of those who have operated the family business for generations!)
However you look at the tax plan, there are angles to consider. A larger corporation owing capital gains the same as a primary residence would appear like a miscarriage of justice for hard-working homeowners. Though, area and median price are key. By all means, do not sell and buy on impulse during this time. Talk to a tax expert and real estate attorney and talk about your plan for your future first. (For more info on the plan, visit whitehouse.gov)
Roxana
