It is in the news. Joe Biden, former Vice President, and presumptive Democratic Candidate for the White House has announced a $775 billion plan to help children and the elderly. This includes universal childcare and additional in-home healthcare services. But like anything that involves spending money, it must come from somewhere. In this case, his target is real estate investors.
According to a recent report from Bloomberg:
“…a senior campaign official said a Biden administration would take aim at so-called like-kind exchanges, which allow investors to defer paying taxes on the sale of real estate if the capital gains are reinvested in another property. The official also said they would prevent investors from using real-estate losses to lower their income tax bills.”
What does this mean “like-kind exchanges’? They are referring to a tax provision known as a 1031 Exchange. Under Internal Revenue Tax Code 121, when you live in a home two of the last five and sell, the gains up to $250,000 if you are single and up to $500,000 when you are married, is tax free. That is what makes real estate great. You can build wealth just by living there. However, investors do not have that same luxury since the property isn’t owner occupied.
For investors, if they sell a property, the profits would be taxed as capital gains. However, there is a work around. If an investor wants to defer the tax, then they would have to reinvest the profits into another investment property within 45 days and meeting certain criteria. You could argue everyone wins, the investor does not get hit with capital gains taxes, and the government does not lose much needed housing.
There are still more details rolling out, so it is too soon to tell how this will overall affect housing and how investors will react. Just like anything, there does need to be a balance. The more you tax an investor, the less likely they make certain moves. This could mean less likely to reinvest the money into additional housing, or it could mean that nothing changes. Time will tell in the long run. Plus, this assumes Biden wins.
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