1 Eliminating the need for the 1031 exchange and making it more difficult for investment real estate owners to buy and sell real estate. So let’s dive into some of the proposed tax plans from president elect Joe Biden. His first part of his plan would eliminate the 1031 exchange from investors who have ordinary income of forty thousand dollars or more. A couple things we are not clear on would be, does that include the asset you are selling currently? Let’s say, two hundred and fifty thousand dollars and you already earned two hundred thousand dollars, those combined would be Four Fifty. So, is he saying that it would be that combined? We’re not quite sure yet, but if that were the case that would eliminate virtually most if not all 1031 exchanges for commercial real estate owners. Which would be really difficult for people to want to sell real estate should that happen. We have large capital gains tax. Also, partnerships like S-Corps and C-Corps that hold investment real estate would be prohibited from 1031 exchanges tax treatment under Biden’s proposed tax plan. As the current IRS regulations required that the deed title holder is the only entity which can be subject to change, which essentially means the whole entity team must move in the traditional 1031 exchanges. There is no drop and swaps and there’s no putting it into something else. That has been looked at and frowned upon for awhile now and a lot of exchanges have been called on that and the tax payer had to pay the tax, so you have to be very very cautious with that already. In addition, it looks like he will put potentially even stricter provisions on that. As well, long-term capital gains tax would be increased to 39.6%, virtually doubling the current 20% rate. As it stands right now, long-term capital gains tax federal is 20% and of course you have state and then you have medicare tax. All of those added up is typically 37% with state, federal and medicare tax. Whereas right now, he is proposing to double the federal to about 40%, which would effectively put everything over 50%, which again, would make it very very challenging for someone who wants to sell real estate.
2 If you look at that and that’s not scary enough to consider. Another thing that is interesting to look at is the elimination of the step-step basis. One of the biggest things in real estate for a long time was the ability to basically die and drop and swap. And you could swap until you drop and drop until you swap. And when you drop, your kids could step into your shoes and actually step into a step-step basis on that asset. Meaning the asset let’s say is worth a million today and when you bought it was 100 thousand. Well if you passed away and still owned it your kids would inherit it as a step-step basis of a million, therefore they could step away capital gains tax free, but he’s proposing to potentially to take that away. And that would also be very challenging for real estate owners.
3 So a lot of things to consider and it’s best to plan. Here at Capital Gains Tax Solutions we want to help you map out an exit plan not having to use a 1031 exchange. Using something called a Deferred Sales Trust. You can actually go to captialgainstaxsolution.com to learn more about that. And what is nice about the Deferred Sales Trust it’s actually a back up plan for a failed 1031 exchange. So if you are in a 1031 now, which actually just did a deal recently we saved Georgia a 7.6 million dollar multifamily property. He saved his 1031 exchange and he’s been able to diversify and to be on the side lines and wait for property values to drop, it’s a nice part of the deferred sales trust, all tax deferred. Again you can go to captialgainstaxsolution.com to learn more about the deferred sales trust and how it might be able to help you save a failed 1031 exchange. Or go to experttaxsecrets.com if you are a business professional, realtor, commercial real estate syndicator, financial advisor and learn more about the deferred sales trust. Appreciate you watching this video and here’s the key. Have a plan, prepare, and get everything in order for your next 1031 exchange or have an alternative like the deferred sales trust.
Answered by: Brett
Capital Gains Tax Solutions Website | Email Updated 5/17/2022 8:28:00 AM