Do you think tax changes will hit REI now?

Question

PLEASE let me make my disclaimer on what BP is and is not:  Bigger Pockets, not, Being Political.  So, my intent is not to whatsoever divulge into party favorites, but, there is some context as to how politics could affect taxes...

OKAY so with my disclaimer out of the way, there is this one news article about this one rich and famous guy who owns a lot of RE assets who only paid something like $750 in taxes.

I'm not on someones side FROM A POLITICAL PERSPECTIVE; but it is worth me (nervously) stating the article felt short sighted...it seems to me that there was some exclusion to context (I mean, that's news 101) and for example there was no mention of property taxes paid.  I can't think of any way in the world you get out of that.  In fact, with my IQ of at least 1, let me say I think that paying property taxes en masse is essentially the loophole in not paying other taxes, including income etc.  Also, the leverage effect of writing off interest, the 15, 20, 30 etc year depreciation schedules...

Let's use a different name also common in REI:  Robert Kiyosaki.  The man has written many a thing on how to pay Uncle Sam as little as possible.  Right?

So all I am trying to say, ask, dialogue about, is that is this bigger than just the politics, at least bigger than the big names, and could it hit me and you?  If so what are things we can begin to do now to hedge for this?  I know I was pretty bummed about the entertainment / meals changes which affected anyone with an LLC etc...so I just want to be less shortsighted and felt like this *could* be a place for a healthy conversation.

what do you think?  will we see more changes in a year or 4 years with taxes for REI?  Is there a bigger narrative here that could affect more than just a big name but affect all of REI?

Sara Kirkpatrick · Answer

@Nate Sanow

Politicians are using real estate as an investment, as in the ones who write the rules for real estate are the ones using real estate to their advantage.   Changes for sure, but not massive ones.

Steve Morris · Answer

"I know Biden is pushing for capital gains tax increase from 37 to 39%. That's such a tiny amount for the highest earning individuals."

Per the Wharton study, ending the 1031 is also an option under consideration by Biden - Which'll royally f-up things.  That'll effect everyone with investment property.

Dave Foster · Answer

Anyone who thinks that 1031s are a rich mans tool is sorely mistaken.  The average sales price of a property 1031d is less than $300K.  Not skyscrapers and huge complexes - we're talking main street America  here.  I'm pretty sure a disruption in the tax deferral for people selling for less than $300K is going to affect a lot of normal folks.  Fortunately there's a lot of time between now and that actually happening.

Steve Morris · Answer

I'm only sending this for accuracy since I don't think a lot of other reporters understand how taxes and comm real estate works.

I work with apartment owners and I can almost guarantee that if they buy an apartment with a loan of any size, they'll have tax deferral for a while.

Two things in our tax system (good/bad that Biden wants to change), mortgage interest deduction and depreciation.

If you own a house with debt, you understand the tax break you get for making a mortgage payment.

How depreciation works is if you buy an apartment with $1M worth of building, instead of deducting the cost of the building immediately (with carry-forward provisions), the IRS says to divide $1M by 27.5 and you can set that against your income annually for 27.5 years.

Right or wrong, it is our tax system and everyone can take advantage and I'm sure 98%+ take every tax break they can get which Trump did.  If they sell investment property without a 1031 exchange, they'll pay capital gains and depreciation back.

This is not a pitch for Trump at all, I'm just wish they were accurate when you portray Trump as an outlier when he's prob pretty typical of any real estate investor.

Mary Cronin · Answer

I think I have to mention unintended consequences (again).

When congress changed the change in passive investing rules during the Reagan years, it caused a RE recession that lasted for years. High earners stopped using RE as investment depressing the market.

If congress eliminated the mortgage deduction, then the sensible thing would be to pay cash (probably a lot less) and invest in something else that is tax advantaged (businesses?) That was part of Rich Dad books on investing - follow the tax laws when you invest. The tax laws are written to induce people to act in a way the government wants. If you want people to buy homes, then the mortgage deduction induced them to do so, since they couldn't afford them otherwise.

If congress eliminated the 1031 exchange, then the sensible thing would be to hold onto properties for your heirs (as long as they don't eliminate the step-up in basis for inherited property).

Anyway you look at it, changes will affect how we invest (positively and/or negatively).

It's worth watching carefully.

Nate Sanow · Answer

@Sara Kirkpatrick    thanks for your comment, yes, let us hope there is solace to be found in politicians being reasonable in any tax reform even if the motivations aren't said to be altruistic.

Jaron Walling · Answer

@Nate Sanow I read that article and I don't have a gun in this argument but I'm pretty sure the big orange haired man filed for bankruptcy and leveraged business "losses" as to not pay any federal income taxes for the last 15 years.

I don't think tax changes will severely affect real estate investing or the super wealthy. What it needs (or attempt) to do is give the poor and middle class a better income.

I know Biden is pushing for capital gains tax increase from 37 to 39%. That's such a tiny amount for the highest earning individuals.

Karl B. · Answer

That debate gave me PTSD. That and I was stressed because some guy tiled one of the bathroom floors in a rental and I saw the work yesterday and to my horror discovered he grouted along the walls seriously half an inch instead of tiling = it looks like garbage (I told him to remove the quarter round and get something wider to cover the grout corners because it's awful and he'd probably screw it up more otherwise).So I barely slept last night. :-(One vital notion is whether or not the House or Senate will keep/flip. If Dems take the Senate, keep the House and Biden wins, things could get rough tax/policy-wise for us BPers.

If Republicans keep the Senate (more likely than not, IMO) and Dems hold the House (very likely, IMO) then as usual no matter who wins the Presidency we will see political gridlock, blaming and nonsense from both sides, as usual.

If the 1031 ends I expect more commercial properties to wait (selling-wise) until the 1031 appears again; it'd take years but large capital gains + no 1031 = too much to Uncle Sam.

Nate Sanow · Answer

@Steve Morris thank you for sharing your thoughts.  Me no likey the end of the 1031.  That's dumb.

Do you think tax changes will hit REI now?

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