How Could Biden’s Tax Plans Affect Real Estate?

Written by Ashley Sutphin Posted On Monday, 05 April 2021 00:00

President Biden is working on a new tax plan that will raise tax rates for some. The increases could be among the most significant since the 1990s, and real estate investors and professionals are looking at the proposed plan to see how it might affect them.

The Tax Cuts and Jobs Act from 2017 put in place quite a few measures affecting property owners. For example, there was a $10,000 cap on state and local tax deductions. There was also a lower limit on the mortgage interest deductions. Instead of deducting up to $1 million, taxpayers can deduct the interest on loans up to a maximum of $750,000.

Democrats are pushing for a repeal of the $10,000 cap on state and local deductions, which was detrimental to homeowners in blue states with higher tax rates.

In general, President Biden is proposing eliminations to many of the Tax and Jobs Act components.

A few things that have been floated and could affect real estate include:

• The elimination of bonus depreciation. This was a tax incentive of the TCJA that let real estate investors or businesses automatically deduct a big percentage of their purchase price of eligible assets instead of writing them off over their useful life.
• The new tax plan could eliminate 1031 exchanges. A 1031 exchange is when one investment property is swapped for another, allowing the deferral of capital gains taxes. This is popular in real estate, and it’s been around since the 1920s in the U.S.
• The plan could raise long-term capital gains tax rates for high earners. For those earning over a million dollars a year, long-term capital gains taxes could go up. They would be taxed at regular earned income rates instead of long-term capital gains rates. Currently, the top bracket for long-term capital gains is 23.8%, if you could the net investment income tax, which is 3.8%. The proposal from Biden is an increase of the long-term capital gains tax bracket to 43.4% if you earn over a million dollars annually.
• There’s a proposal for the elimination of the step-up basis. This is also dubbed the death tax. Currently, if you were to inherit a house, for example, and then sell it the next day for its current value, you wouldn’t have to pay taxes on the gain.
• There could be the implementation of a $15,000 first-time homebuyer credit.
• The estate tax exemption might be reduced to $5 million, while it was doubled to $11.18 million under the TCJA.
• The top federal income tax bracket would go to 39.6% from 37%. While this isn’t a direct real estate effect, it would affect investors in real estate who are high earners.

As it stands now, we don’t know whether Biden’s tax plan will pass and if so it’s unlikely that every element will go through as-is. With that being said, there are quite a few things contained in the bill that could impact people who invest in real estate, and even someone who inherits a home for example.

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