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How 5 Key Biden Administration Tax Proposals Could Impact Real Estate Owners

by Dave Hirsch, Ryan Sievers, David Erard, Mike Jennings
May 11, 2021

Although tax law changes proposed by the Biden administration have yet to be vetted and negotiated, it certainly appears that individuals with significant real estate holdings should expect changes that may significantly increase their federal tax burden if enacted as proposed. Below are some of the recent proposals that may end up changing tax planning significantly for individuals and businesses that focus on the real estate area, along with a few preliminary observations.

  1. Capital Gains - Loss of preferential federal tax rate (currently 20%) on long-term capital gains for individuals with more than $1M of taxable income, and treatment of carried interest gains as ordinary.
    • The impact of this change would be quite significant. It would effectively double the rate of tax on some capital gains from the 20% current rate to a 39.6% ordinary rate proposed by the Biden administration.
    • Timing may be critical as the effective date of new tax rates is unclear. It is possible that changes could be retroactive to January 2021, effective as of the bill introduction date, the date legislation passes or at a future date. Monitor this carefully.
  2. Estate Tax - Changes to estate tax rules including possible taxation on certain appreciated assets at time of death and potential elimination of basis step-ups.
    • Not only would capital gains income tax rates be higher, many common estate planning ideas and techniques also would need to be reconsidered.
  3. Section 1031 - Potential limitation on the ability to defer gains using §1031 like-kind exchanges.
    • Outside of real estate exchanges, §1031 exchanges would no longer be applicable after 2017.
    • Proposal to limit or eliminate deferral of gains in excess of $500,000.
  4. Corporate Tax Rate - Increase in the federal corporate tax rate from 21% to 28%.
    • This will increase the tax burden on foreign investors who invest in U.S. real estate via a blocker entity.
  5. IRS Enforcement - Significant funding to the IRS to increase enforcement.
    • Not only could there be a number of significant and unfavorable tax changes, there may also be a significant increase in IRS enforcement activities in the near future.

There are other significant proposals that may impact those who have significant taxable income from real estate holdings. We will continue to evaluate the proposed changes as additional information becomes available.

For questions or assistance, contact our experts.

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