Eric is a real estate investor, founder of MartelTurnkey, and author of Stop trading your time for money.
Does President Biden’s recently announced American Families Plan mean big problems for the real estate market? To better understand the implications of this potential bill, let’s take a look at the details.
By and large, the American Families Plan is an investment in human infrastructure such as childcare and education. That’s the good part of the program. The disadvantage? In order to pay for these programs, increased taxes are charged.
To be clear, at this stage the American Families Plan is just that: a plan, not yet a bill. There are still a few details to be clarified. For now, however, we are focusing on three specific proposed tax increases targeted specifically at real estate and determining how this will affect our investment strategies.
In my view, real estate is one of the last remaining investment opportunities the average American can use to gain financial freedom and build a legacy for their children. Neither the exchange nor a 401 (k) will do that. A family business is not so easy to transfer alongside a real estate portfolio, and children often have no interest in continuing the family business for several generations. Achieving passive income through real estate investments is therefore an ideal way to shape the financial future of your children.
The first change proposed by the Biden Plan would be to increase capital gains tax to 39.6% for households earning over $ 1 million. The long-term capital gains tax is currently at its highest level of 20%. Will this surge actually destroy real estate? Probably not, but it will likely deter and / or delay property owners from selling. Property owners could instead choose to refinance their existing properties for their next purchases, reducing the supply of buildings available for sale and thus driving up prices. That said, chances are anyone who makes more than a million dollars a year has a team of tax attorneys with strategies to avoid these types of taxes. For example, opportunity zones, foundation plans, and other strategies could still be implemented to avoid taxes on them.
Another big change in this plan: the removal of the 1031 exchange for profits greater than $ 500,000. In addition, you would have to pay 39.6% capital gains tax. This tax deferral is critical to building wealth and creating wealth across generations. How will that affect real estate? Investors who own apartment buildings, for example, will likely wait to sell these properties until capital gains or stock exchange laws become more favorable to them. Instead, they could switch to smaller single-family homes to avoid the 1031 swap. This would then reduce the demand for the multi-family houses, but increase the demand for single-family houses and raise their prices. This would be detrimental to middle class Americans trying to take the first step in buying real estate and building long-term wealth. If people just want to buy a house to live in, house prices will also rise as investors flock to residential property.
The third big change is to remove the increased tax base for profits over $ 1 million ($ 2.5 million per pair “in combination with existing real estate exemptions”) and tax profits when the property is not for charitable Purposes is donated. The reform is “designed with protective measures so that family businesses and farms do not have to pay taxes if they are passed on to heirs who continue to run the business”. For some reason, real estate investments are not considered a family business. Most likely, illiquid assets can pay the tax over an extended period of time, perhaps seven or more years.
This would have a dramatic impact on the wealth of several generations. The step-up basis states that in the event of death, the value of your real estate and assets will be “upgraded” to their current market value. If the beneficiary decides to sell immediately, he does not pay any capital gains tax. As you can imagine, this is a great way to bequeath wealth to your children.
Imagine your parents own a house in California that you bought for $ 300,000 40 years ago. After her death, the topped-up base now values the home at $ 2 million (not a crazy appreciation in California, trust me). You can sell your parents’ home for $ 2 million and pay no capital gains tax. Under the proposed new Biden plan, the first would be $ 1 million, which would be over $ 277,000 in taxes to be paid on the death of your parents, compared to nothing today.
Who will be most affected by this new plan? I tend to be cynical and assume that the very wealthy will rely on tax attorneys to protect their assets. Your children don’t have to pay taxes while at the same time controlling equity. Instead, the middle class, who do not have the resources to buy expensive tax lawyers or the time and resources to devise new investment strategies, will bear the burden of this new plan. I also believe the plan will affect the middle class’s ability to invest in real estate, gain financial freedom, and leave an inheritance for their children.
Will the Biden American Families Plan Destroy Real Estate? Of course not. Investors and entrepreneurs are resourceful and always adapt. Real estate will continue to be a strong investment; it will only mean a big shift in the types of assets being invested in. Because I assume that residential property prices will rise as demand increases. Hope you found this article helpful and insightful.
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