President Biden’s Proposal 2024 budget It seeks to cut taxes and reduce the deficit for the low-income while promoting greater access and improved affordability to health care and education, but the proposed funds will be used to raise taxes on the wealthy and Gains from the elimination of significant tax breaks for real estate investors. will probably be rejected Completely by many in Congress.
Depending on politics, there may be different solutions to taxes. Many may suggest that changing tax laws to hurt the wealthy is more complicated than you might think. can harm middle-class families, research suggests.
In this article, we’ll take a look at how this proposal to tax law will affect real estate investors in particular.
tax increase on the rich
The proposed budget would increase taxes on wealthy Americans in several ways. For example:
- Increases the capital gains tax rate from 20% to 39.6% for those earning at least $1 million a year.
- Increases the Obamacare tax rate from 3.8% to 5% for those earning $400,000 or more.
- Impose a tax rate of 0.01% on the richest, or a minimum of 25% on households above $100 million
- Raises the tax rate on personal income from 37% to 39.6% for those earning at least $400,000, reversing previous tax cuts.
- Limit maximum contributions to Roth IRA accounts for those earning $400,000 or more
- Removes the step-up of the inheritance basis on death that impacts unrealized capital gains over $5 million ($10 million for co-filers)
It is important to note that although the top 1% effective tax rate has declined since the 1970s, it is still high. 8 times higher That’s above the average effective tax rate for bottom half earners, according to the Tax Foundation.But because the federal government paid $1.38 trillion With revenues surpassing 2022, it’s no surprise that policymakers are considering raising taxes on the wealthy. research Tax cuts improve the economy, government denies claim to collect taxes low income Lower tax rates could make it imperative to increase tax rates for at least some taxpayers.
However, raising the capital gains tax beyond the threshold can have unintended consequences. For example, a homeowner whose annual income is less than her $1 million or $400,000 sell your house in the hot market, the million-dollar home is not a mansion, but a median single-family home.For example, the median home price in San Francisco is about $1.3 million, even after declining last year. Even with the capital gains exclusion for primary homes, homeowners who bought properties that were a hot market 20 years ago are likely to lose a higher percentage the year they sell. Buying a similar home at mortgage rates can be difficult for movers.
It is unknown how many people fall into this category. However, it is worth considering whether specific exceptions are needed and whether increasing capital gains taxes is the best way to meet the federal government’s goals.For example, critics say raising the capital gains tax rate discourage savingsThe Congressional Budget Office consumption taxEncouraging saving over spending would have the greatest impact on narrowing the deficit, but it also disproportionately affect low income. There are no easy solutions.
Abolition of 1031 exchanges
Another aspect of the proposed budget is 1031 “homogeneous” exchanges Section 1031 of the Tax Code allows individuals to defer payment of capital gains tax on investment property by using the proceeds to purchase similar property of equal or greater value.a fact sheet The White House compares tax incentives to “perpetual interest-free loans from the government” and categorizes them as “wasteful spending on special interests.”
There seems to be a misconception that real estate investors are already wealthy and insatiably greedy, avoiding paying a fair tax rate while exploiting tenants to generate more income. You’re perpetuating stereotypes, but most of the time they’re plain wrong. The 1031 “loophole” benefits not just the wealthy, but real estate investors in all walks of life.
Owned by a family run landlord 41% of all rental properties Nearly 73% of all 2- to 4-unit buildings. These aren’t million dollar people.The estimated average annual income of a landlord is $97,000While real estate is often touted as the preferred investment vehicle for the ultra-rich, it is also a tool for ordinary people to increase their retirement savings and save enough to send their children to college. Small-value transactions of inexpensive properties make up the majority of similar transactions.
moreover, research It shows that there is no waste in similar exchange tax deductions. This has played an important role in promoting economic activity and revitalizing the community, added. $97.4 billion Value to US GDP in 2021. Homogenous exchanges make investing more efficient and generate hundreds of thousands of dollars. new jobIt also makes it viable for investors to convert vacant commercial space into apartments. This is important to encourage in today’s housing shortage. The National Association of Realtors offers several services. anecdotal example On how the 1031 exchange empowered the investor community.
Critics say decommissioning the 1031 exchange will reduce federal revenues, exacerbate housing shortages, and lead to lower quality housing for tenants. Businesses may also be discouraged from moving to buildings that better meet the needs of their business and employees. While there may be benefits to putting limits on 1031 exchanges, eliminating them entirely would likely hurt the economy, the study suggests.
There are strong arguments for higher taxes on the wealthy to fund social programs. It may not be the only way to improve economic mobility, lift people out of poverty and reduce wealth inequality, but it is a potential solution. famous billionaire I agreed with the idea and came out.
However, in the process of reforming the tax system, policymakers fear that the proposed solutions may unintentionally harm low- and middle-class families and communities, or real estate investors who actively contribute to the economy. care must be taken not to affect
Not sure how to maximize your real estate business deductions? Tax Strategy Books for Savvy Real Estate InvestorsCPA’s Amanda Han and Matthew MacFarland share the actionable information you need to not only pay your taxes this year, but prepare an ongoing strategy that will make next tax season easier.
Note by BiggerPockets: These are opinions written by the authors and do not necessarily represent the opinions of BiggerPockets.