The Biden Tax Plan - Impact to Multifamily?
Investor · FL · Member since 2017 · 247 posts · 245 votes
Curious to hear everyone's thoughts on the proposed tax plan from Biden and its impact on multifamily, or real estate in general.
A couple highlights from the proposal:
#1 Elimination of bonus depreciation
#2 Elimination of 1031 Exchanges
#3 Raise long-term capital gains tax rates for high-income earners
#4 Elimination of step-up basis
#5 Implement a $15,000 first-time homebuyer tax credit
It’s all speculative at this point.
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.
Time will tell.
@Steve Morris i paid 66k in property taxes this week, so yeah.... i dont like paying more - but its the system we have and this system allows me to do pretty much as i please / which i think is pretty cool. So i may grumble but i am not moving - are you?
@Adam Martin curious - do you think you could go one day without benefiting from things our taxes paid for? Its all well and good to complain- but your ability to invest in RE is possible due to property rights, and the infrastructure that supports those rights (paid for by taxes) also your taxes pay for so much that is taken for granted... look around and be grateful you live here where you can become the next billionaire if you so desire.....
@Adam Martin curious - do you think you could go one day without benefiting from things our taxes paid for? Its all well and good to complain- but your ability to invest in RE is possible due to property rights, and the infrastructure that supports those rights (paid for by taxes) also your taxes pay for so much that is taken for granted... look around and be grateful you live here where you can become the next billionaire if you so desire.....
I do not disagree and believe that if we do not have taxes we do not have a society. I need roads, I rely and support the police and military, without which we would have anarchy, and if the pandemic has taught me anything, I am a bad educator and my kids need to be in school. If it were up to me there would be no income tax, it would be a federal sales tax on any purchase, no deductions, no personal return, and no exceptions. All money is eventually spent and will be taxed at the same rate for everyone. If I work a regular w-2 job they will come out of my check, if I sell crack it will be collected when I buy whatever I buy, minus the crack of course, that would remain tax free as it is illegal. Where I disagree is the current Robin Hood attitude where it is the obligation of the rich to bail out the poor. While I don't realistically see people leaving the us in any meaningful form if you want to see where it happens at a state level look at the exodus of states like CA and NY moving to low tax states such as Fl, and TX. Students took loans, there is no reason to forgive their obligation however I feel we need better education in highschool so people understand what they are signing up for as well as focusing on alternatives like learning a trade. The last housing crash tried to teach us that ownership is not a right, if you don't have a saving mindset you are setting yourself up to fail. UBI is just a transfer of wealth to increase taxes. I do like the idea of universal healthcare, I just don't think we would do a good job, look at issues at the VA and the governments history of moving like molasses and inefficiency. We already have a system of it with Medicaid where the poor still qualify. When you look around the world the countries that have all these freebies have high taxes so the productive in society are just supplementing those that are not. We do need social safety nets to protect our most vulnerable however a lot of systems have rampant abuse and checks need to be in place. Long story short I believe in small government to keep us safe however we all need to accept individual responsibility and I want them out of my life as much as possible, taxes included.
As a more personal note while we may not agree on taxes or certain social issues you do seem like a caring and responsible landlord which is sometimes refreshing based on some posts I see and I do appreciate your insight.
Thankfully it looks like the republicans may retain some control here and the chances that Biden's tax plan passing are pretty low.
Republicans should be very thankful and should count their blessings while they can because (once again) the polls did not show the eventual result. Biden very well could have won and controlled the house and senate which would put a lot of us in not so fun waters as I'm sure some sweeping tax law would have been introduced.
My main concerns are
#1 Elimination of bonus depreciation
#2 Elimination of 1031 Exchanges
and the income tax change on earners above 400K. Not because I make 400K....but because one day I'd like to! LOL
@Steve Morris i paid 66k in property taxes this week, so yeah.... i dont like paying more - but its the system we have and this system allows me to do pretty much as i please / which i think is pretty cool. So i may grumble but i am not moving - are you?
Well, am selling out.
I'm seeing lot of people over-paying in Portland and I'm hearing almost daily that I will not buy in Portland proper. I think outlying areas like WashCo and Vancouver still attractive, but local govt is not a selling point in Portland.
@Travis Watts to say it’s a problem is an understatement. As a tax lawyer, my colleagues and I are already game planning this out. However, depending on the Senate control, it may not be a problem.
@Adam Martin
@Mary M.
I agree. Mary has a less emotional (or non-spiteful) manner in how she espouses for the benefits of paying higher taxes.
Let's not 'eat the rich'.
@Mary M
Whenever I re-enter the United States after spending time abroad, and I come through an international airport and go through Immigration and Customs, I exclaim - 'Thank God, I am back in the United States. This is where some of our Federal Taxes go towards. Everything is conducted in an orderly and professional manner'.
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! :-)
Exactly the approach I have as well. Try and stay centered and ready to adjust and adapt. Less emotion leaves more brain power to focus on what's in our Circle of Control.
@Jai Reddy
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...
Good explanation from Adam on stepped up basis. I would also add that 1031 exchanges receive stepped up basis at time of death; something I learned in the last year. Ex: Mom and Dad were RE investors all of their lives. Way back, they bought a condo as their first rental for 30K. 5 years went by and the condo skyrocketed to 120K so they sold and 1031 exchanged into a Single Family House rental for 400K (they had 90K in gains plus their initial down payment and mortgage paydown over the years, so they netted 100K and paid 25% down on the house). Another 10 years went by and their rental house appreciated to $1M so they sold and 1031 exchanged into an apartment complex for $3M (they had 600K in gains on the house, plus 150K of down payment and mortgage paydown over the years, so they netted 750K and paid 25% down on the building. The apartments had decent cashflow and provided a steady passive income stream for their last 30 years of life. Upon their deaths (which happened simultaneously; 'The Notebook' style), their lovely building was worth $10M and you inherited the property and sold for market value (you greedy SOB) with zero capital gains due because your basis in the property was 'stepped up' to $10M (I don't know the specifics of estate taxes but I think they kick in over $11.58M). This is an incredible long term strategy as long as 1031 and Step Up basis remain in place. Side note- if you are unfamiliar, 1031 is a way to defer your taxes. If at any point along the story above, Mom and Dad 'cashed out' of their investment, they would have had to pay all capital gains due from all previous investments. Instead, the winning strategy is to die and don't make $12M bucks.
@Mary M. You are so so right. Being from NJ with some of the highest property tax, income tax and property cost I would never consider stop investing here given the huge returns I am getting on my flips and the large rental cash I'm receiving on my holds.
Taxes are there but by no means do they stop me from investing.
Under Trump administration I lost 15k a year because he cap personal property tax deductions at 10k (ouch) but he put a few other goodies in place to offset that some. It's all good.
When taxes were 70-90% people in that bracket just adjust accordingly so they have the least amount of exposure. Gotta Love It!!!!!
We are all going to be paying more taxes going forward, regardless of who is in the white house. WE have an oversized debt and it isn't going away. They can call it anything they want i.e. "a fuel surcharge", not a tax, but you will be paying more to Washington.
Bonus depreciation is a great friend and I hate to see it go, but it does not serve any more meaningful purpose, than MARS depreciation.
1031 is safe, it has been around for a long time and it is not unique to real estate. It does serve a purpose in allowing business to upgrade and change without a tax consequence. If it is more cost-effective to reinvest the money than put it in my pocket, I am more likely to reinvest.
RE pro is safe as well. The definition may become more narrow, but it will live on. If I buy and sell a commodity, why can't I take a loss against erarings?