I can see bonus depreciation being limited or eliminated. I don’t see that as a big deal as many people can’t use the passive losses generated by bonus depreciation anyway.
Getting rid of the 1031 would be a big mistake and would hamper the real estate market. I believe arguments can be made that would suggest the 1031 actually increases tax revenues by increased property valuations and generally increases all forms of economic activity which is ultimately taxed - people who buy properties generally spend more money fixing them up than existing owners who often do the minimum. I believe the 1031 survives.
Taxes of all sorts will increase which actually makes the tax deductions available thru real estate investing more valuable. A dollar of tax deduction at a 20% tax bracket rate saves 20 cents. A dollar of tax reduction at a 30% tax bracket rate saves 30 cents.
A huge first time buyer tax credit may hurt rental demand.
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
5y
They might get some through but I think there could be opposition on others. The elimination of stepped up basis really hurts alot of people not just investors. The impact on the middle class and small businesses is significant. And to pay for college ? stupid idea.
I can see bonus depreciation being limited or eliminated. I don’t see that as a big deal as many people can’t use the passive losses generated by bonus depreciation anyway.
Getting rid of the 1031 would be a big mistake and would hamper the real estate market. I believe arguments can be made that would suggest the 1031 actually increases tax revenues by increased property valuations and generally increases all forms of economic activity which is ultimately taxed - people who buy properties generally spend more money fixing them up than existing owners who often do the minimum. I believe the 1031 survives.
Taxes of all sorts will increase which actually makes the tax deductions available thru real estate investing more valuable. A dollar of tax deduction at a 20% tax bracket rate saves 20 cents. A dollar of tax reduction at a 30% tax bracket rate saves 30 cents.
A huge first time buyer tax credit may hurt rental demand.
Edmond, OK · Member since 2012 · 456 posts · 270 votes
5y
@Arn Cenedella
Another way to look at the 1031 Exchange as beneficial to the IRS tax collection, by design, is that the exchanges allow the IRS to tax ‘real estate compounding’, instead of taxing every real estate taxation. So, by leaving our capital to grow at a compounded basis, it can tax more at the end (and more by eliminating step up basis for inheritors).
So, it may leave 1031 exchanges in place but remove the step up basis.
Edmond, OK · Member since 2012 · 456 posts · 270 votes
5y
@Arn Cenedella
Another nuance about increasing tax bracket marginal rates that you brought up (a higher 30% rate means a 30% reduction of tax for a valid expense). It is true now, but Congress has amazing ways to hurt through taxation if passed. They can say, all RE deductions are taken at 15% even though the tax payer is in the 30% marginal tax bracket.
All true. No one knows what will happen. The interesting political dynamic to watch is the divide within the Democratic Party. Will Progressives or so called Moderates prevail? I have no idea.
I had an interesting conversation with a RE Tax expert re the Cap Gains rate. He said, even in the best of times, it would be absolute suicide to raise such rates. They tried this a while back and it really killed investment, especially foreign investment. Given the low savings rate in our country, it is more imperative to attract investment from overseas dollars. The capital gains rate is designed to attract that money more than anything and have foreign investors invest in the US and get a better return than they could if they kept the money in their home countries.
He said without the preferential capital gains treatment, it could kill all foreign investment dollars coming in.
Fortunately, I see the Republicans keeping the Senate so this wish list is not likely to happen.
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
5y
Depends on if the Ds can flip the Senate, but:
#1 Elimination of bonus depreciation - Kinda think its a nit, but a minor deal unless you flip properties in 3 years. Unless you defer it (see #2), you need to recapture depreciation anyways at 25% (today's rate).
#2 Elimination of 1031 Exchanges - Very big deal, it'll f-up the investment RE business for an extended period. Don't know/care (I'm old and selling out) what happens in 10 years when it stabilizes.
#3 Raise long-term capital gains tax rates for high-income earners - He wants new taxes, breaking news water is wet.
#4 Elimination of step-up basis - Dying won't be a good investment move anymore. Think radical change is bad since some people rely upon it, However, holding stuff with rights of survivorship will probably be de rigeur.
#5 Implement a $15,000 first-time homebuyer tax credit - Obviously, we didn't learn anything from the 2010 crash. Some people can't afford to buy a house AND service the debt even with a $15K tax credit. More foreclosures and screwed up loan portfolios next downturn.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
5y
I think that folks always overreact to this kind of thing.....remember that RE investors have done well over a long period of time - even when interest rates were 12%+ and taxes were far more than they are now. Stay aware, adjust accordingly and invest for the long term and you should be ok. A final word - while I benefit (a small amount) from Trump tax cuts, I dont mid paying higher taxes if it benefits those that have less. If all of us refused to "chip in" we would have no roads, infrastructure etc. its just part of the social contract we all agree to when deciding to live and invest in the US.
I think that folks always overreact to this kind of thing.....remember that RE investors have done well over a long period of time - even when interest rates were 12%+ and taxes were far more than they are now. Stay aware, adjust accordingly and invest for the long term and you should be ok. A final word - while I benefit (a small amount) from Trump tax cuts, I dont mid paying higher taxes if it benefits those that have less. If all of us refused to "chip in" we would have no roads, infrastructure etc. its just part of the social contract we all agree to when deciding to live and invest in the US.
OOC - What thing has more new taxes fixed permanently :)
You live in Portland, we're on our 3rd large bond in 5 years and barely 25% of black males perform at grade level in spite of countless equity/diversity positions.
New to Real Estate · Madison, WI · Member since 2020 · 14 posts · 8 votes
5y
I do not see how getting rid of the 1031 exchange would be beneficial. In my opinion, this would take take away more tax revenue than it would create, in the long run. I do not get why the 1031 exchange is being targeted for removal, I believe this attempted removal will not pass through the senate.
Edmond, OK · Member since 2012 · 456 posts · 270 votes
5y
@Dustin Zenz
Other than Section 179 ‘enhancements’ and Bonus Depreciation, which were directly instituted by Trump’s bill, pre-existing conditions like 1031 and stepped-up basis for inheritance are not easily eliminated in any new bills should Biden want them. They’ve been there for a while and may only be used as bargaining chips to effectively kill bonus depreciation.
Contractor · Cleveland, OH · Member since 2020 · 33 posts · 25 votes
5y
Great question from the OP, and very interesting and thoughtful replies. That being said, I have tried to assume more of a Zen approach to politics at large. I figure that regardless of who is in office, the sun is still going to rise tomorrow, and we still have investments to watch over and businesses to run. Regimes change, regulations and tax structures change, laws change. As they say, "The one constant is change". It is our jobs to adapt to those changes in ways that are most beneficial for our families, businesses, employees and tenants. ...And hold our breath for the next four years! :-)
I'm not super familiar with the step up basis. Can you or another BP member explain the basics of this to me?
Step up cost basis is a way to transfer wealth tax free through inheritance. The way it works is lets say grandma purchased some disney stock way back for 20/share, if she would sell it while living she would have long term capital gains of about 115/share and the gov would tax that. Lets say grandma dies though and and passes the funds to you this is when the step up comes into play. You will inherit the funds but not her cost basis, they will step up to the value at death. Lets say you decide to sell them when she passes and they have risen , you will only pay the capital gains on what it raised from from when she died and the gov will not collect the tax revenue from the difference and it is costing them money. Now lets say grandma is grandma disney, this is who they are trying to capture as generational wealth being passed down by influential families, it will work and generate a lot of revenue and they will still be rich. Who it really hurts is the middle class, especially when your parents leave you their house or worse yet the family farmer inheriting the farm. It sounds good on paper to "stick it to the rich" but you are really hurting a very wide array of families.
To make it fit better for multifamily or real estate in general lets say mom bought property in Seattle way back for 80k and now it is worth 1M, if she sold it she would have to pay taxes on the gains. If you inherit it and sell it shortly after and the date of death value is 1M and you sell it for 1M you get it tax free assuming there were no estate taxes that had to be paid which is rare anyway.
For those who are feeling charitable, give to charity but don't force me to do it. If you feel the government will handle this responsibly and can handle the funds better please itemize your taxes and claim no deductions, pay what you feel is your share. If you are looking for a way you can help now the following is a link from the bureau of the fiscal service where you can just donate money to the government. Remember it is only charity when you are giving your money, when you force that on others it is theft. https://fiscal.treasury.gov/pu...