Biden introduces plan to increase taxes on Real Estate investors

[Tyler Baldwin]

Presidential candidate Joe Biden plans is announcing a $775 Billion dollar plan to boost Child and Elderly care. It’s a decade long plan that will be paid for by reducing or eliminating 1031 tax breaks for real estate investors making more than 400k a year.

Quote from Bloomberg: “a senior campaign official said a Biden administration would take aim at so-called like-kind exchanges, which allow investors to defer paying taxes on the sale of real estate if the capital gains are reinvested in another property.”

According to The NY Times: “Biden’s campaign said the programs, some of which would be operated with state and local officials, would be paid for by rolling back some taxes on real estate investors with incomes over $400,000, as well as by increasing tax enforcement on the wealthy.”

How will this potential new policy impact you?

My first thought, put more emphasis on Cost Segregation Studies to reduce tax liability in a world without/reduced 1031’s

[Account Closed]

@Shiloh Lundahl Perhaps it would de-incentivize some very wealthy people but there’s plenty of others who don’t make $400k/yr to fill the gap. Fundamentally comes down to philosophy on income inequality.

Also everyone pays capital gains tax without deferral on other investments and securities.

[Josh C.]

@Shiloh Lundahl

You only pay taxes on gains. Not equity. So you pay the “15%” or whatever on the increased value and depreciation recapture. Using your example paying taxes on the interest your money is earning at the bank due annually. Which is already the tax law.

[Josh C.]

@Anthony Wick

It’s a lot more common than you think. Half of our clients would fall in this category. Capital gains can be huge, especially for people on the coasts. Heck most investors that bought anything in SOCal more than 5 years ago would have this appreciation. Every time an apartment comes up for sale about 10 cash buyer come flying in with tight timelines trying to burn some 1031 cash. I’m talking million dollar plus cash offers literally flying around because they sold there rental homes in LA/Denver/San Diego/Washington DC/etc. where the tax bill could actually bankrupt them. It’s considerably more than a couple thousand.

80% of millionaires in America are first generation wealthy and didn’t inherit anything. Most of this money won’t be coming from “Wolf of Wall Street” types. Will mostly be older people who worked hard and smart their whole life.

[Aaron Stafford]

Sorry to see so many "soak the rich, at least it's not me" statements here. We're ALL here to get rich and a tax on one is a tax on all. 

1. I bought my rentals from a richer man. If he's hit, he'll hang onto his properties until he dies and little starters like me will miss their chance to begin the climb.

2. The tax will be crept down to lower tax brackets every year. Every tax started as a 'only the rich' tax.

3. Many states will copy this, so will some cities. So triple the expected impact.

4. As some others have posted, many jobs and contractors make their living in the exchanges. Trading properties is a healthy thing that rehabs homes and whole communities. This will be reduced until such laws.

5. The money will be rolled into yet another permanent government agency/dependent group of people, that grows every year.

6. The rich aren't evil and shouldn't be 'punished' as such. They make decisions that are much faster and more sensitive to local needs than an alphabet bureaucracy. No dollar should be given to government if it can be avoided.

[Mindy Jensen]

Originally posted by @Frank Breetz:

Thanks for re-posting this. I didn't see the 400k limit listed anywhere in the other thread:

https://www.biggerpockets.com/...

 and then Bigger Pockets locked the thread and sent out an email to all their users about it. There are a lot of people freaking out on that thread about a thing that will not affect them, and they are probably supportive of, if they knew this detail. I am a fan of Bigger Pockets, but I feel let down by this experience.

If you are still against it. The fact is the richest 1%(those making over 400k a year) have a lower tax rate then everyone else. They didn't earn their money by themselves, they leveraged the infrastructure of the laws and government to obtain this money.

Another fact is wealth disparity is at an all time high. We simply cannot continue to live this way.

Hi Frank. The thread you refer to rapidly turned into a political discussion which is why it was locked. This one seems more focused on the actual subject at hand. We want this topic discussed, but we have to remove politics from the site.

[Steve Morris]

"They didn't earn their money by themselves, they leveraged the infrastructure of the laws and government to obtain this money.

Another fact is wealth disparity is at an all time high. We simply cannot continue to live this way."

Disagree - Everyone has access to the same tax breaks, some people rolled the dice, saved and scrimped to buy properties and it turned out well for them.  To the point they pay most of the taxes now (if you make <$50K, odds you're paying taxes are vanishingly small).

How did you want to address wealth disparity?  By getting rid of the rich?  You can tax them all you want, but they have better CPAs.

Or in the case of public employees that are getting a lot richer - Better politicians.

[Steve Morris]

The thread you refer to rapidly turned into a political discussion which is why it was locked. 

Mindy - Any way you can verify the $400K and what it covers since you're running this board?  I just read Biden's proposal on Wharton's WEBsite and it made NO mention of $400K income.

[Scott Johnson]

Originally posted by @Lee Yoder:

I believe the same thing will happen that always happens when government thinks they've come up with a good idea for taking money from rich people- the rich people will make different decisions and avoid the tax. It's laughable to me when the government says, "If we implement this tax, we'll raise this amount of money." It never works out as planned, because wealthy people tend to be smart with their money and they figure out how to avoid the new tax. I'm not saying this new tax won't increase tax revenues at all, because it will, but it won't come close to what the government advertises. Also, the decrease in transactions for like-kind properties will decrease income for all parties involved in these transactions which will decrease tax revenues for the government.

Yea, this is where my thoughts lie.  

[Brian Hamel]

@Tyler Baldwin the sky is not falling. Us investors will adapt. This will probably effect newbies more and hopefully slow the crazy real estate inflation

[Jon Schwartz]

Guys and gals, there's nothing just or unjust about taxes. The 1031 exchange is not a property owner's right that's at threat of being taken away. In short, the government thinks of ways to generate revenue: "Let's put a tax on thing you buy, on income, on operating a car," etc. etc.

Then, wealthy people push for legislation to lower the taxes that affect them the most. We all know that real estate is a decent way to get wealthy, so it's no surprise that the tax code favors real-estate investors.

I don't believe that the government is incentivizing or de-incentivizing much of anything; it's just a bunch of politicians responding to their constituents -- and primarily the ones with dollars to contribute to the next campaign.

It's like the argument that capital gains shouldn't be taxed because it's double taxation. "Double taxation" is a very smart term that I'm sure came from a focus group somewhere years ago. When you think about it, everything we do is double-, triple-, quadruple-taxed! When you buy a car, you pay a sales tax with your income that was already taxed. You pay more tax at the pump to drive the car, and then you pay an annual tax on top of that so long as the car is operable. If you utilize express lanes on the highway -- guess what! That's another tax.

As an investor toward the beginning of his career, I'd hate to lose the 1031 exchange. But it's nothing to get self-righteous over.

[Steve Morris]

Originally posted by @Account Closed:

@Shiloh Lundahl Perhaps it would de-incentivize some very wealthy people but there’s plenty of others who don’t make $400k/yr to fill the gap. Fundamentally comes down to philosophy on income inequality.

Also everyone pays capital gains tax without deferral on other investments and securities.

Not in your 401K or IRA. You defer them until you take the money out.

[Steve Morris]

Originally posted by @Brian Hamel:

@Tyler Baldwin the sky is not falling. Us investors will adapt. This will probably effect newbies more and hopefully slow the crazy real estate inflation

Why would you buy a property if you didn't believe it didn't provide some shelter from inflation?  I realize operating income is part of the equation, but appreciation is a major part of it also.

[Steve Morris]

Originally posted by @Jon Schwartz:

As an investor toward the beginning of his career, I'd hate to lose the 1031 exchange. But it's nothing to get self-righteous over.

What's the reason to change at all then?  Lot of people buy with a reliance on govt policy being consistent (crazy idea) and it affects their decisions.

Look up ex pos facto.

[Account Closed]

@Steve Morris True but what’s your point? You can buy real estate with SDIRA or SD401k money.

I think we are talking about non-IRA /401k money here.

[Jon Schwartz]

Originally posted by @Steve Morris:

Originally posted by @Jon Schwartz:

As an investor toward the beginning of his career, I'd hate to lose the 1031 exchange. But it's nothing to get self-righteous over.

What's the reason to change at all then?  Lot of people buy with a reliance on govt policy being consistent (crazy idea) and it affects their decisions.

Look up ex pos facto.

There's no reason to change. Consistent policy is ideal. I lost most of my deductions under this administration, and I'd factored my mortgage interest deduction into all of my calculations. Total bummer!

But if the government needs to raise revenue, the rules will change. And if moneyed interests prevail, the rules will change again.

[Account Closed]

The rolling 12 month federal deficit as of June is $3 trillion. Keep in mind the federal government is spending $60 billion per month in extra unemployment benefits, on top if the $1200 one time stimulus from the Cares act.

Most of this stimulus goes to help lower income / higher impacted people, who happen to be predominantly renters. So a lot of federal spending is probably keeping rent coming. Oh right and also homes over peoples heads and food on their table.

So yeah, if very wealthy people who probably benefitted from federal stimulus to keep rent coming might need to lose the ability to defer capital gains on real estate like every other type of investment, is it really that crazy?

[Sam B.]

Originally posted by @Anthony Wick:

@Tyler Baldwin

This would affect an extremely small number of people. Only 1% of the people even make $400k a year or more, and who knows what percentage do 1031 exchanges. So, how many people would this affect a year? A couple thousand?

Every single tax starts like this.

[Steve Morris]

Originally posted by @Account Closed:

The rolling 12 month federal deficit as of June is $3 trillion. Keep in mind the federal government is spending $60 billion per month in extra unemployment benefits, on top if the $1200 one time stimulus from the Cares act.

Most of this stimulus goes to help lower income / higher impacted people, who happen to be predominantly renters. So a lot of federal spending is probably keeping rent coming. Oh right and also homes over peoples heads and food on their table.  

So yeah, if very wealthy people who probably benefitted from federal stimulus to keep rent coming might need to lose the ability to defer capital gains on real estate like every other type of investment, is it really that crazy? 

Wealthy people already pay a disproportionate amount of taxes (like the top 1% pay 20% of taxes) while if you make <$50K you're probably paying $0 Fed income taxes.

Stimulus is a temp (I hope) thing.  Most of the deficit (the largest spends) are SocSec and Medicare, then Defense is lot less, but next.

Why not just leave the exemptions alone?  The economy moves best when there are fewer govt changes.  You make changes and more people get hurt.

I remember whn the battle cry was "Everyone should be able to buy a house and govt should help".  Then 2009 came along . . .

[Account Closed]

@Steve Morris

Valid point that policy changes introduce churn and uncertainty. And true hopefully the stimulus is temporary and one time. But it’s also a huge temporary and one time number. Seems like something’s gotta give.

Also just pointing out, the top 1% control 40% of US wealth so paying 20% of taxes doesn’t seem that bad.

[Steven DeBose]

It will affect a lot more than a few thousand.  Also, it could have affect on people that are closing out portfolio's, the upper middle class that want to invest but won't now, and more.  

How about we get the that income from the well fair system, or quit shutting down economies and printing money.  Don't even get me started on the inflationary issues and how that will affect things and could easily push incomes higher over the next 5-10 years.

[Steven DeBose]

It will affect a lot more than a few thousand.  Also, it could have affect on people that are closing out portfolio's, the upper middle class that want to invest but won't now, and more.  

How about we get the that income from the well fair system, or quit shutting down economies and printing money.  Don't even get me started on the inflationary issues and how that will affect things and could easily push incomes higher over the next 5-10 years.

[TJ Turner]

Some are saying go ahead and tax the rich more.  I have worked hard and have had nothing given to me so that one day soon I will be in the 1% group.  I never thought that because someone made something of them self that they should be punished.  Just the opposite is true, they should be admire and everyone should see that if they can make it then so can you.  

[Jordan Moorhead]

Great campaign promise. This would have to pass the house and senate. Make sure you vote for what you believe in and understand the policies!

[Jin Kim]

@Greg Dickerson I do see the property taxes definitely going up in the near future, especially in the highly populated areas. I also see sales tax everyone going up as well.

I personally don't think it'll get passed because a lot of government members own business and rental properties for side income and tax deferred benefits.

[Greg O'Brien]

@Jin Kim spot on. There are several loopholes in the tax code you can trace to certain senators and their lobbyists. Will be a tough sell in congress.

Look to the new 199A deduction. They did a last minute drafting change to BENEFIT RE investors.

Why? Senator Bob Corker! He snuck in the 2.5% of unadjusted basis rules and a few other things that benefit RE. He has a substantial RE empire...