Joe Biden became the 56th President of the United States on January 20, 2021. During his presidential campaign, he proposed a comprehensive tax plan that real estate investors need to know about.
Below, we’ll take a look at key components of President Joe Biden’s proposed plan and their potential real estate implications. What follows are policies from his campaign platform, which may or may not become law during Biden’s presidency.
1. Eliminating 1031 Exchanges
A popular tax strategy that’s been in place since 1921, a 1030 exchange involves swapping one investment property for another to defer capital gains taxes. Biden proposes eliminating these exchanges, which means investors would need to pay taxes at the time of sale.
Historically, 1031 exchanges have provided substantial tax benefits for real estate investors, so if they’re part of your strategy, you’ll want to keep a close eye on Congress.
2. Eliminating Bonus Depreciation
Bonus depreciation, also called additional first-year depreciation deduction, allows real estate investors and businesses to immediately deduct a large percentage of a new asset (like appliances or real estate property improvements) instead of deducting it across the asset’s useful life.
For example, with bonus depreciation, if you spent $8,500 on landscaping for your new rental property, you can deduct 100% of the expense in the same year you spent the money.
President Biden wants to end this Trump Administration policy, which could greatly affect your tax strategy as a real estate investor.
3. Raising Long-Term Capital Gains Tax Rates for High-Income Earners
Biden proposes raising the long-term capital gains tax bracket from 20% to 39.6% for anyone earning more than $1 million per year. This is essentially equivalent to those earners paying regular earned income taxes on the gain.
The good news for high-earners is that history suggests implementing this change will be hard.
4. Eliminate the Step-Up Basis
Currently, there’s a step-up basis law (also called death tax or inheritance tax) in place that reduces the tax burden on inheritance, including any real estate. Under the current law, you only pay taxes on an asset’s gains from the time of inheritance, not the time of original purchase.
For example, if you inherit a house valued at $300,000 that your parents purchased for $170,000 in 2002, and then sell it for $330,000, you’ll owe taxes on just the $30,000.
Biden wants to eliminate the policy, in which case, you would owe taxes on the gains in value from the time of original purchase. If enacted, in the same scenario above, you would owe taxes on $160,000.
This change would have big implications for real estate investors who plan to pass property down to their children or who may be inheriting property from loved ones.
5. Reduce the Estate Tax Exemption
Biden wants to reduce the estate tax exemption to $5 million from $11.18 million. Under his proposed changes, a person who passes away with more than $5 million in assets would owe an estate tax. This exemption change would affect individuals with valuable owned assets, including real estate.
6. Tax Incentives for Green Energy Investments
Given the Democratic Party’s commitment to environmental concerns, we can expect tax incentives aimed at reducing carbon emissions. MarketWatch suggests these could include tax breaks or credits for emission-reducing or green energy investments in residential buildings.
Tom Wheelwright, CPA and author of Tax-Free Wealth, says the opportunities for tax incentives will be unbelievable, calling it “the biggest thing since the internet, in my mind.”
If you want to save on taxes while investing in real estate, pay attention to Congress and any new green initiatives.
7. $15,000 New Home Buyer Tax Credit
Called the “First Down Payment Tax Credit,” this proposed tax change would provide first-time homebuyers with a $15,000 advanceable tax credit to help purchase a property. Biden’s campaign website states that buyers would be able to access the funds at the time of purchase instead of waiting for the credit come tax season.
If the new credit is treated the same as the American Recovery and Reinvestment Act, the money can only be used to purchase a primary residence. Real estate investors can’t use it to buy a rental property. However, if you’re an aspiring real estate investor, it could be the seed money you need to buy your first home, gain financial stability, and then start building a real estate portfolio.
Other potential implications of the tax credit include:
- Increasing demand in a market that already has low supply, which could drive up prices
- Increasing demand, which could help real estate investors who rely on flipping properties
- Decreasing the number of families and singles seeking to rent, which could make finding tenants more difficult
8. $1,400 Stimulus Checks
On March 11, 2021, President Biden signed the $1.9 trillion Covid relief bill into law. It includes stimulus checks valued at $1,400 for individuals earning up to $75,000, married couples earning up to $150,000, and heads of households earning up to $112,500.
If you qualify for a stimulus check, you can put the money toward a downpayment on a property or renovations. If you’re a landlord, your tenants coming into some extra cash from the stimulus check and/or enhanced federal unemployment benefits could mean on-time rent payments.
This is the only policy on this list that’s currently a law.
9. Phase Out Qualified Business Income Deduction (QBI)
Income earners making over $400,00 would no longer be able to take full advantage of the QBI deduction, which allows certain self-employed individuals and small business owners to deduct up to 20% of their qualified business income.
10. Raise Top Federal Income Bracket
A proposed increase to the top federal income bracket from 37% to 39.6% would affect high-earning real estate investors.
11. Increase in Social Security Tax for Income Over 400,000
Biden wants to add a social security tax on income over $400,000. If passed, workers would owe 12.42% (half employee contribution and half employer contribution) on their first $142,800 in wages. Then, if you make over $400,000, you would owe the 12.42% tax on every dollar over that limit. You would not pay any social security taxes on income between $142,801 and $400,000.
Again, this change is not specifically tied to real estate, but it would affect any real estate investors who are high-income earners.
When Will Biden’s Tax Plan Go Into Effect?
It’s hard to predict when or if or which parts of Biden’s Tax Plan will become law. Former-President Trump signed the Tax Cuts and Jobs Act into law in December 2017—11 months after taking office. However, since Biden entered office amidst the COVID-19 pandemic, there are other legislative priorities in play.
Additionally, Democrats only have a slim majority in the Senate, so passing tax legislation would require unanimous party support along with the support of a few Republicans. Although, Biden could use a process known as budget reconciliation to pass some of his tax changes, which would only require a simple majority of 51 votes.
