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How Biden’s Real Estate Tax Plan May Impact Small Property Investors

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Real estate investors may soon pay more taxes on high-value transactions.

President Joe Biden is asking for higher taxes on real estate transactions with profits of more than $ 500,000.The tax plan is intended to help cover the $ 1.8 trillion American family plan, which helps drive the money toward child care, leave. Family vacation and study program

However, finance experts say the tax hike could put pressure on small investors.

The butcher-based strategy ̵

1; called the same exchange or 1031 – allows investors to defer tax payments on real estate by rolling their profits onto their next property.

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“You don’t have to cut your hair to share Uncle Sam every time you move from one investment to another,” said Michael Repak, senior vice president and real estate planner at Janney Montgomery Scott in Philadelphia.

Investors can now use the 1031 Exchange to buy and sell tax-deferred real estate for life. If an investor holds the property until his death, they can pass it on to the heirs without paying taxes.

“This is a great way for real estate investors to make money,” said Matt Berquist, certified financial planner at Jacksonville, Florida and managing director of Intrepid Capital Management.

The Congressional Joint Taxation Committee estimated that 1031 stock markets could save $ 41.4 billion in taxes for investors from 2020 to 2024.

Slashing tax breaks

Biden aims to circulate on 1031 exchanges with profits exceeding $ 500,000.

Financial experts say the impact could be far-reaching, especially when the call for an increase in capital gains taxes is raised.

About 12% of real estate sales were part of 1031 exchanges from 2016 to 2019, according to the National Association of Realtors’ 2020 survey.

Those investors may not be the real estate entrepreneurs many would expect.

Small business

Although Biden’s plan is targeted at the wealthy. But the offer might also be a hit with small investors.

A National Association of Realtors survey shows that 84% of 1031 exchanges come from retail investors, owned by companies. Sole (47%) or S-corporations (37%).

“There will be unintended consequences if all else goes through,” Berquist said.

Small businesses looking to exchange assets may face a difficult decision.

“People have to be ready and open to change as needed.”

Matt Berquist

Managing Director at Intrepid Capital Management

For example, let’s say that a dental establishment owns a $ 1.2 million building that was originally purchased for $ 500,000.Under current law, the owner can exchange the property for a “identical” office building and defer the tax by increasing the profit of $ 700,000. Into the new building they bought

The new law will levy a tax on corporate profits higher than the $ 500,000 exemption.

Repak said the new rules could make it difficult for those looking to trade in low-maintenance assets as they move into retirement.

The proposed changes could affect small businesses renting real estate.

Sixty-eight percent of those surveyed by the National Association of Realtors expect rents to rise if 1031 exchanges are canceled.

Repak said the landlord may try to recoup the loss or the extra tax by charging more rent.

“Tenants are probably the easiest way to try and get things done,” he said.

Start planning

While details remain murky, Repak said some investors are starting to prepare for the change. He says it’s prudent to start talking with your estate planning lawyer and accountant.

However, those affected should not make an impulsive decision.

“There is everything in the bag that can be changed for the average person,” said Berquist. “People must be ready and open to change as needed.”

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