With the new incoming administration there’s many changes that will take place and analysts speculate that plan will reduce GDP by 1,5% but increase tax revenue by around 3.8 trillion from 2021 to 2023.
In this episode I’m going to be talking about the major tax changes especially the ones that relate to real estate and also how they will affect them.
Here’s some of the major proposed changes:
- The 2017 Tax Cuts and Jobs Act has a tax rate of 37% for individuals that make over $400.000 a year and the new administration will reverse that so the new tax rate would be 39,6% for those who make over $400.000 a year
- An income over $400.000 a year would be taxed at 12,4% known as a social security tax. This is split between the employees and the employers
- There’s an itemized deduction cut-off of 28%
- The corporate tax rate will be raised from 21% to 28%
- Companies will pay more on their foreign income
- Capital gains will be taxed will the same rate as ordinary income but only for houses earning more than one million dollars. As of right now, short term capital gains are taxed at the same rate as income but long term capital gains have a much lower tax rate. So again, that would change. It would be taxed the same.
As of right now, if you were to sell a real estate investment you could defer capital gains on that exchange and it’s know as the like-kind exchange. Some refer to it as a 1031 exchange where you can take one property and switch it for another and with the new administration you would not be able to do that.
That’s really popular with real estate investors right now.
Estate and Gift Tax
Next, the estate and gift tax right now is 11,85 million in 2020 and before it was half of that. This means that if you had an asset that was above that threshold of 11,85 million, you were subject to a 40% tax rate and what the new administration plans to do is to lower that 11,58 million threshold. Before the Tax Cuts and Jobs Act it was about half of this so you can expect that it should go down to around half of it or even lower. This means that if you try to do the Like-Kind Exchange you are limited to the amount of assets you can transfer without activating that tax rate.
The incoming administration plans to expand the Child and Dependent Care Tax Credit. This means that you will be able to claim more if you have a dependent.
What’s the overall assessment of these tax changes in real estate?
The good news is that it won’t really affect you too much unless you make over $400 000 a year, however with the Like-Kind Exchanges like the Section 1031 like I mentioned with the capital gains that you earn on exchanging a property, that’s a negative and the overall just on the economy itself, GDP is going to be reduced by 1,5% and that’s never a good thing.
Also, with the decrease in the Estate and Gift Tax, like we said you will be able to transfer less assets before you activate that tax rate so that’s a negative for the home owner as well.
One thing to keep in mind is this is only a tax plan. This hasn’t been put into effect and we don’t know exactly how this will impact real estate. These are projections. These are assumptions. We won’t know exactly how they will impact real estate and the broader economy until they’re actually put into place so we’ll just have to see.