In the multifamily investment sales space, I deal with many families in the private capital arena – small property owners who own anywhere from one to five real estate assets, many of which they have owned for many years. Usually the story goes: matriarch/patriarch purchased an investment property in the 1980s for let’s say $500,000 which is now today worth let’s say $2,500,000.
If and when these folks decide to sell, there are a few paths that they can take. They can utilize a 1031 Exchange, allowing them to sell their property and purchase another with the proceeds of the sale to avoid paying capital gains taxes (on what would be approximately $2,000,000 of gains given the example above). Others do not sell and leave the property to their heirs when they pass away allowing the heirs to utilize the “step up in basis” loophole where they are able to sell the property with little to no capital gains exposure. And then there are some long term owners just bite the bullet, sell their property and actually pay the capital gains taxes. Virtually all of these options are at risk with Biden’s new tax proposal.
1031 Exchanges At Risk
The Biden plan would eliminate the ability to conduct an exchange when capital gains are greater than $500,000. For the example above, that family would not be able to utilize the 1031 Exchange tax loophole allowing them to defer their capital gains taxes by purchasing a replacement property.
Elimination of the “Step Up in Basis”
The Biden administration has called for ending the ability to “step up” the cost basis for real-estate when it is inherited. The stepping up allows heirs to calculate capital gains on the sale of property using the market value at the time they inherited it, rather than when it was originally purchased. Stepping-up the basis can reduce the tax burden for heirs considerably under these circumstances.
Increase in Capital Gains Rate
Perhaps the most critical component of Biden’s tax proposal is the increase of the tax rate on capital gains for households making over $1 million. The plan proposes raising the rate to 39.6% for, up from 20% where it current stands for the country’s top earners.
All in all, these components of Biden’s tax proposal would not be good for real estate owners.