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WWe talked about it, and with the Biden administration, there’s a new sheriff in town. With the new sheriff, many changes in tax law will have a major impact on real estate investors. One surprising proposed change is the change in capital gains tax rates that are part of the Build Back Better Act.
The last time we saw huge changes in the tax code was with the passage of the Tax Cuts and Jobs Act under the Trump administration. Now, the Biden administration has proposed to make some changes to the taxation of capital gains. This could definitely have a huge impact on the bottom line for real estate investors! Let’s read on to learn more about the proposed changes to capital gains taxation.
TC: I deleted the two paragraphs above under the first subheading below. The intro dived a bit too much into detail / minutes. Now, following up on that sentence above, let’s add a ‘here’s why real estate investors should care’ type of phrase that will prompt the reader to read ‘below the waterline’ (I guess that’s is a dated phrase, maybe “scroll down” will replace it).
Capital gains tax rate
As a reminder, capital gains taxes are capital gains (increase in income) realized on the sale of a fixed asset. I know it’s a mouthful so let me break it down a bit more.
When you sell a fixed asset – it could be your house, a commercial building to renovate, a residential rental property, a stock, a bond or even collectibles (for example , an old stamp collection) – for a higher price than what you paid for it, the profit from the sale is included in your income and Uncle Sam charges you tax.
Here are the 2021 long-term capital gains tax rates. Remember, if you have short-term capital gains, they are taxed at the ordinary income tax rate.
|
Taxable income |
15% tax rate |
20% tax rate |
|
|---|---|---|---|
|
Filing status |
|||
|
Alone |
Up to $ 40,400 |
$ 40,401 to $ 445,850 |
Over $ 445,850 |
|
Head of household |
Up to $ 54,100 |
$ 54,101 to $ 473,750 |
Over $ 473,750 |
|
Married spouse filing |
Up to $ 80,800 |
$ 80,801 to $ 501,600 |
Over $ 501,600 |
|
Marriage filed separately |
Up to $ 40,400 |
$ 40,401 to $ 445,850 |
Over $ 445,850 |
Source: IRS
Image source: Getty Images
The prices don’t stop there. If you sell small business stocks or collectibles, the maximum capital gains tax rate is 28%. In addition, a section 1250 gain, the portion of a gain on a sale that was previously amortized, is taxed at a maximum rate of 25%. This is of the utmost importance for real estate investors. These are the current rules, but the Biden administration has proposed some changes.
Capital gains tax project
Under the Build Back Better bill, the top marginal tax rates will drop from 20% to 39.6%. It’s a big increase, even for the richest of us. In addition to this tax rate hike, the Biden administration is calling for increasing marginal income tax rates for wealthy Americans from the current rate of 37% to 39.5%.
While Biden’s proposed tax changes have financial implications, with proper tax planning, many people will still be able to reduce some or all of their exposure to capital gains tax.
Some strategies that could potentially be explored are to take advantage of the like-for-like exchange of Article 1031, the exclusion of Article 121 (exclusion of principal residence) or the installment sale method. section 453 to offset or defer capital gains. In addition, with the proposed increase in the SALT deduction (from $ 10,000 to $ 80,000), individuals will have the opportunity to offset more of their capital gains at the state and local levels.
So while capital gains tax rates are on the rise, real estate investors are still in luck. With proper tax planning in advance, investors may be able to defer or offset some or all of their earnings!
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