{"id":6828,"date":"2023-03-31T19:19:42","date_gmt":"2023-03-31T19:19:42","guid":{"rendered":"https:\/\/imsfund.com\/?p=6828"},"modified":"2023-03-31T19:19:42","modified_gmt":"2023-03-31T19:19:42","slug":"new-proposed-tax-plan-seeks-to-eliminate-1031-exchanges","status":"publish","type":"post","link":"https:\/\/imsfund.com\/index.php\/2023\/03\/31\/new-proposed-tax-plan-seeks-to-eliminate-1031-exchanges\/","title":{"rendered":"New Proposed Tax Plan Seeks To Eliminate 1031 Exchanges"},"content":{"rendered":"<p> <br \/>\n<\/p>\n<div :class=\"{ 'hidden': $store.proContent.showFullPrompt() }\">\n<section class=\"px-4 relative border border-slate-200 mobile-toc lg:hidden\" x-data=\"{open:false}\">\n<button class=\"flex items-center gap-4 my-2 border-none w-full\"><br \/>\n<svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"h-6 w-6\" fill=\"none\" viewbox=\"0 0 24 24\" stroke=\"currentColor\" stroke-width=\"2\"><path stroke-linecap=\"round\" stroke-linejoin=\"round\" d=\"M4 8h16M4 16h16\"\/><\/svg><\/p>\n<h2 class=\"font-semibold text-slate-800 text-base m-0 js-toc-ignore\">In this article<\/h2>\n<p><\/button><\/p>\n<\/section>\n<p><span data-preserver-spaces=\"true\">President Biden\u2019s proposed\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.whitehouse.gov\/omb\/briefing-room\/2023\/03\/09\/fact-sheet-the-presidents-budget-for-fiscal-year-2024\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Budget for the Fiscal Year 2024<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0seeks to promote expanded access and improved affordability in healthcare and education while cutting taxes for low-income families and shrinking the deficit, but the proposed funding comes from increasing taxes on the wealthy and eliminating an important tax break for real estate investors, which\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/apnews.com\/article\/biden-budget-debt-limit-deficit-republicans-56ed3a1b2ed906f89bc84edc435d3e7d\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">will likely be rejected<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0outright by many in Congress.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Depending on your politics, you might have different solutions to taxes. Many might suggest that changing the tax code to be less advantageous for the wealthy is more complicated than you might think. In this case, Biden\u2019s proposal may unintentionally harm middle-class families in the process, research suggests.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">This article takes a look at how this proposal to the tax code could affect real estate investors, in particular.<\/span><\/p>\n<h2><span data-preserver-spaces=\"true\">Raising Taxes for the Wealthy<\/span><\/h2>\n<p><span data-preserver-spaces=\"true\">The proposed budget would increase taxes on wealthy Americans in several ways. For example, it would:<\/span><\/p>\n<ul>\n<li><span data-preserver-spaces=\"true\">Increase the capital gains tax rate from 20% to 39.6% for people earning at least $1 million in any year<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Increase the Obamacare tax rate from 3.8% to 5% for people with incomes of at least $400,000<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Levy a minimum 25% tax rate for the wealthiest 0.01%, or households worth $100 million or more<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Increase the tax rate on personal income from 37% to 39.6% for people who earn at least $400,000, reversing a previous tax cut\u00a0<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Place restrictions on the maximum contribution to Roth IRA accounts for people who earn at least $400,000<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Removes the step-up in basis for inheritances at death, affecting unrealized capital gains greater than $5 million ($10 million for joint filers)\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-preserver-spaces=\"true\">It\u2019s important to note that while the effective tax rate for the top 1% has decreased since the 1970s, it\u2019s still more than\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/taxfoundation.org\/publications\/latest-federal-income-tax-data\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">eight times higher<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0than the average effective tax rate for the bottom half of earners, according to the Tax Foundation. But since the federal government spent\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/fiscaldata.treasury.gov\/americas-finance-guide\/government-revenue\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">$1.38 trillion<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0more than it collected in revenue in 2022, it\u2019s not surprising that policymakers are considering increasing tax rates for the wealthy, especially since wealth disparities were narrower in the years when high-earners paid more.\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.brookings.edu\/wp-content\/uploads\/2016\/06\/09_effects_income_tax_changes_economic_growth_gale_samwick.pdf\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Research<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0belies the claim that cutting taxes improves the economy, and the government collects\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/fiscaldata.treasury.gov\/americas-finance-guide\/government-revenue\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">less revenue<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0when tax rates are lower, so raising rates for at least some taxpayers may be essential.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">There are, however, some unintended consequences of raising capital gains taxes above the threshold. For example, homeowners who earn far less than $1 million or even $400,000 annually may get stuck with a tax bill for\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnbc.com\/2021\/04\/28\/how-bidens-capital-gains-tax-hike-may-hit-home-sellers-in-hot-markets.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">selling a home in a hot market<\/span><\/a><span data-preserver-spaces=\"true\">, where a $1 million home isn\u2019t a mansion \u2014 it\u2019s a median-priced single-family home. For example, the median home price in San Francisco sits at about\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.redfin.com\/city\/17151\/CA\/San-Francisco\/housing-market\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">$1.3 million<\/span><\/a><span data-preserver-spaces=\"true\">, even after declining this past year. Even with the capital gains exclusion for primary residences, a homeowner who bought a property 20 years ago in what has become a hot market could potentially get dinged at the higher rate in the year they sell. That could make affording a similar home at today\u2019s high mortgage rates difficult to achieve for movers.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">It\u2019s unclear how many people will fall into this category. But it\u2019s worth questioning whether certain exceptions may be necessary and whether the capital gains tax increase is the best way to accomplish the federal government\u2019s goals. For example, critics say an increase in the capital gains tax rate\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/taxfoundation.org\/capital-gains-taxes\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">discourages saving<\/span><\/a><span data-preserver-spaces=\"true\">. The Congressional Budget Office estimates that a\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cbo.gov\/publication\/58164\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">tax on consumption<\/span><\/a><span data-preserver-spaces=\"true\">, which would encourage saving over spending, would have the greatest impact on shrinking the deficit\u2014but this would also\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.taxpolicycenter.org\/briefing-book\/who-bears-burden-national-retail-sales-tax\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">disproportionately impact<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0low-income earners. There\u2019s no easy solution.\u00a0<\/span><\/p>\n<h2><span data-preserver-spaces=\"true\">Eliminating 1031 Exchanges<\/span><\/h2>\n<p><span data-preserver-spaces=\"true\">Another aspect of the proposed budget is the elimination of\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/1031-exchange\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">1031 \u201clike-kind\u201d exchanges<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0for real estate investors, which have been around since 1921. Section 1031 of the tax code allows individuals to defer paying capital gains tax on an investment property by using the proceeds from the sale to purchase a similar property of equal or greater value. A\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.whitehouse.gov\/briefing-room\/statements-releases\/2023\/03\/09\/fact-sheet-the-presidents-budget-cuts-wasteful-spending-on-big-pharma-big-oil-and-other-special-interests-cracks-down-on-systemic-fraud-and-makes-programs-more-cost-effective\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">fact sheet<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0from the White House compares the tax benefit to an \u201cindefinite interest-free loan from the government\u201d and categorizes it as \u201cwasteful spending on special interests.\u201d\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">There seems to be a misconception that real estate investors are already wealthy and insatiably greedy, and that they avoid paying a fair tax rate while exploiting their tenants for more income. Perhaps the framing of policy initiatives perpetuates the stereotype, but in the vast majority of cases, that\u2019s patently false. The 1031 \u201cloophole\u201d doesn\u2019t exclusively benefit the wealthy\u2014it benefits real estate investors from all walks of life.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Mom-and-pop landlords own\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nar.realtor\/blogs\/economists-outlook\/landlord-statistics-from-the-2018-rental-housing-finance-survey\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">41% of all rental properties<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0and nearly 73% of all two to four-unit buildings. These are not people earning $1 million annually\u2014the estimated average annual income for landlords is\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.rent.com\/research\/rent-statistics\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">$97,000<\/span><\/a><span data-preserver-spaces=\"true\">. While real estate is often touted as the preferred investment vehicle for the ultra-wealthy, it\u2019s also a tool for everyday people to boost their retirement savings and save enough to send their kids to college. Small deals for inexpensive properties make up the majority of like-kind exchanges.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Furthermore,\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nar.realtor\/magazine\/real-estate-news\/commercial\/the-truth-about-1031s\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">research<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0shows there\u2019s nothing wasteful about the like-kind exchange tax break\u2014it plays an important role in encouraging economic activity and revitalizing communities and added\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/1031buildsamerica.org\/study-ey-lke-macroeconomic\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">$97.4 billion<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0in value to the U.S. GDP in 2021. Like-kind exchanges make investment more efficient, creating hundreds of thousands of\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.forbes.com\/sites\/forbesbusinesscouncil\/2021\/12\/28\/how-eliminating-1031-exchanges-could-affect-property-owners-and-tenants\/?sh=4242ade6516a\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">new jobs<\/span><\/a><span data-preserver-spaces=\"true\">. They also make it viable for investors to convert vacant commercial spaces into apartment buildings, something that\u2019s important to encourage during today\u2019s housing shortage. The National Association of Realtors offers a few\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nar.realtor\/magazine\/real-estate-news\/commercial\/the-truth-about-1031s\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">anecdotal examples<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0of how 1031 exchanges have enabled investors to rejuvenate communities.\u00a0<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">Critics say the removal of 1031 exchanges would reduce federal revenue, exacerbate housing shortages, and lead to a decline in housing quality for tenants since property owners would have less incentive to upgrade their units with new kitchens and bathrooms. Companies may also be discouraged from relocating to buildings that better meet the needs of the business and employees. While it\u2019s possible there could be a benefit to placing limitations on 1031 exchanges, eliminating them entirely would likely have adverse negative effects on the economy, research suggests.\u00a0<\/span><\/p>\n<h2><span data-preserver-spaces=\"true\">The Bottom Line<\/span><\/h2>\n<p><span data-preserver-spaces=\"true\">There\u2019s a strong argument for increasing taxes on the wealthy to fund social programs. It may not be the only way to improve economic mobility, pull people out of poverty, and shrink the wealth gap, but it\u2019s a potential solution\u2014even some\u00a0<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnbc.com\/2019\/02\/25\/warren-buffett-and-bill-gates-the-rich-should-pay-higher-taxes.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">notable billionaires<\/span><\/a><span data-preserver-spaces=\"true\">\u00a0have come out in support of the idea.<\/span><\/p>\n<p><span data-preserver-spaces=\"true\">But in the process of reforming the tax system, policymakers need to be careful that proposed solutions do not unintentionally harm low-income and middle-class families and communities or real estate investors who contribute to the economy in a positive way.<\/span><\/p>\n<div class=\"is-layout-flex wp-container-4 wp-block-columns alignwide\">\n<div class=\"is-layout-flow wp-block-column\" style=\"flex-basis:43%\">\n<figure class=\"wp-block-image\"><a href=\"https:\/\/store.biggerpockets.com\/products\/the-book-on-tax-strategies-for-the-savvy-real-estate-investor?utm_source=blog&amp;utm_medium=blog%20banner\"><picture decoding=\"async\" class=\"wp-image-137064 sp-no-webp\" title=\"New Proposed Tax Plan Seeks To Eliminate 1031 Exchanges 2\"><source srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book.webp 450w,https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book-300x300.webp 300w,https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book-150x150.webp 150w,https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book-200x200.webp 200w\" sizes=\"(max-width: 450px) 100vw, 450px\" type=\"image\/webp\"><source srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book.png 450w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book-300x300.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book-150x150.png 150w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book-200x200.png 200w\" sizes=\"(max-width: 450px) 100vw, 450px\" type=\"image\/png\"><img src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book.png\" decoding=\"async\" loading=\"lazy\" class=\"wp-image-137064 sp-no-webp\" title=\"New Proposed Tax Plan Seeks To Eliminate 1031 Exchanges 2\" alt=\"tax book\" height=\"450\" width=\"450\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book.png 450w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book-300x300.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book-150x150.png 150w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/tax-book-200x200.png 200w\" sizes=\"auto, (max-width: 450px) 100vw, 450px\"\/><\/source><\/source><\/picture><\/a><\/figure>\n<\/div>\n<div class=\"is-layout-flow wp-block-column\" style=\"flex-basis:57%\">\n<p>Not sure how to maximize deductions for your real estate business? In <em>The Book on Tax Strategies for the Savvy Real Estate Investor<\/em>, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year\u2014but to also prepare an ongoing strategy that will make your next tax season that much easier.<\/p>\n<\/div>\n<\/div>\n<p class=\"italic\"><b>Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n<\/div>\n<p><br \/>\n<br \/><a href=\"https:\/\/www.biggerpockets.com\/blog\/new-tax-plan-takes-aim-at-investors\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In this article President Biden\u2019s proposed\u00a0Budget for the Fiscal Year 2024\u00a0seeks to promote expanded access and improved affordability in healthcare and education while cutting taxes for low-income families and shrinking the deficit, but the proposed funding comes from increasing taxes on the wealthy and eliminating an important tax break for real estate investors, which\u00a0will likely [&hellip;]<\/p>\n","protected":false},"author":5,"featured_media":6829,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center 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