Top Changes for Real Estate Investors under the Biden Tax Plan

Instead of offering insight into trending Commercial Real Estate articles, I thought that it would be beneficial to the readers as to how President-Elect Joe Biden’s new tax proposals could affect real estate investors.

As we prepare for a new President of the United States to take office, below I highlight some of the proposed tax changes that would affect both real estate investors and business owners. The below is according to the tax plan Biden released before the election.

Joe Biden has proposed to eliminate many components many elements of the Tax and Jobs Act (TCJA) which was implemented in 2017 by President Donald Trump.  The TCJA was primarily a tax reform to help stimulate the economy by reducing corporate tax rates and provide additional tax incentives to real estate investors and business. Now with the possible reversal of the TCJA and other proposed changes, let’s uncover the potential implications.

  • Elimination of bonus depreciation – a tax incentive, which was part of the TCJA, that allows a business or real estate investor to immediately deduct a large percentage of the purchase of eligible assets, rather than write them off over the “useful life” of that asset. Items that may qualify for bonus depreciation include, but not limited to, the purchase of appliances, furniture, and other real estate property improvements.
  • Eliminate 1031 exchanges – a 1031 exchanges is a swap of one investment property for another that allows capital gains taxes to be deferred.
  • Raise long-term capital gains tax rates for high income earners. Long-term capital gains tax would increase for those earning over one million dollars a year. President-elect Biden has proposed raising the long-term capital gains tax brackets to 43.4$ for those earning over one million dollars per year.
  • Implement a $15,000 first-time homebuyer tax credit. This proposal is similar to the Housing and Economic Recovery Act in 2008. The purpose would be to allow affordability and accessibility to first-time homebuyers.
  • Eliminate the step-up basis. For example, if your parents bought a house in 1970 and paid $40,000 for it, and today the house is worth $400,000. If your parents were to pass away and leave you as the sole beneficiary of the house, there is a step-up basis law which allows the original costs basis to “step-up” to today’s full fair market value for tax purposes. If you were to sell the house the next day for $4000000, there would be no tax due on the $350,000 “gain.” Under President-Elect Biden’s tax proposal, this step-up basis would be eliminated, and therefore, you would be responsible for the tax due on the $350,000 “gain”.
  • Phase out Qualified Business Income Deduction (QBI) for income earners making over $400,000. QBI allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes
  • Reduce the estate tax exemption from $11.18 million to $5 million. The Tax Cuts and Jobs Act double the estate tax exemption to $11.18 million for individuals and $22.36 million for married couples. This means a person can pass away with $11.18 million in assets and not have an estate tax due; Biden has proposed that this reduced to $5 million.
  • Raise Corporate tax rates to 28% from the current 21% level. Starting in 2018, the tax law cut the corporate tax rates paid by C corporations from 35% to 21%. There is also a proposed 15% minimum tax for corporations with profits of $100 million or higher. This minimum tax is structured as an alternative minimum tax; corporations would pay the greater of their regular corporate income tax or the 15 percent minimum tax. Please note, net operating loss and foreign tax credits would still apply.
  • Raise the top federal income tax bracket back to 39.6% from 37%. This would affect income earners who earn over $400,000 per year.
  • Social Security tax increase for high income earners. As it stands today, the 12.4% Social Security tax stops kicking in once you earn more than $137,700 per year. The Biden proposal would have this tax kick back in for any income earned over $400,000.