When it comes to your bottom line, election results can have tremendous consequences. Given that federal and state income taxes are the single largest expense for many Americans, we will point out a few of the major items affecting you in Trump and Biden’s tax plans and what you can do to plan for either election outcome.
Regardless of who wins in November, deficit government spending will continue at an alarming rate, and raising taxes will be inevitable.
So, get out your notebooks and let’s begin a 2020 year-end tax planning session.
Long Term Capital Gains Tax
The single biggest tax issue that Joe Biden is proposing is to eliminate the long-term capital gains tax rates (assets held for longer than one year). Long term capital gains taxes range from 0%, 15% and 20% depending on your income. If you make between $40,001 and $441,450, you are in the 15% LTCG tax rate bracket.
If Joe Biden is successful in removing this, you would end up paying 37% instead of 15% on the sale of any assets. In contrast, Donald Trump is planning to eliminate the top bracket of 20% and dropping all long-term capital gains tax rates to 15%.
Ordinary Income Tax
Joe Biden wants to raise the top individual income tax rate from 37% to 39.6%, which is essentially rolling back the Tax Cut and Jobs Act provision. Additionally, for small business owners making more than $400,000, Biden wants to phase out the 20% deduction for “qualified business income” from pass through entities such as partnerships, S Corps and LLCs.
Eliminating the 1031 Exchange
For real estate investors, the 1031 Like-kind Exchange has been a long-favored tax tool to defer paying taxes on real estate tax gains indefinitely.
Like-kind exchanges have been part of the U.S. Internal Revenue Code since 1921. They allow real estate investors to defer capital-gains taxes when they sell properties by directing the proceeds into new investments, usually within a few months after the sale.
Not surprisingly since Trump is a real estate billionaire, he has no plans to remove this from the tax code. However, Joe Biden will likely succeed in eliminating the 1031 if he has the House and Senate on his side.
Jeffrey DeBoer, head of the Washington, D.C. based Real Estate Roundtable industry group, said one key trait of 1031 exchanges is that they allow investors to own real estate with less debt. “As a result, exchanges allow cash-strapped minority, women and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds,” he said. “Like-kind exchanges are particularly important during economic downturns when access to capital is less certain.”
Recommendations for Tax Strategies
So, what can you do to protect yourself in the event these tax plans become policy in 2021?
We recommend the following along with always talking with your tax attorney and accountants to strategize:
- Convert your Traditional IRA or 401K into a Roth IRA. If you take the tax hit now at a lower rate, you will be able to pull that money out at retirement, tax free.
- Sell your assets in 2020. We believe there will be a huge stock market and real estate sell off event in November and December of 2020 if Joe Biden wins the election, with sellers frantically trying to get ahead of any 2021 long term capital gains changes.
- Sell your REIT stocks in 2020. If the 1031 Like-kind Exchange is eliminated in 2021, we believe that publicly traded REIT’s will take a huge hit in stock price values. Despite NAREIT’s tremendous lobby power, it may not be enough to save this favored tax tool for commercial real estate.
- Refinance your properties, cash out and wait out the storm. This is likely going to be Recentric’s approach moving forward. Interest rates are still historically low, and if you have a long-term view on your investments, you can weather the market volatility.
One important point to keep in context is that US Tax policy is not unilateral or decided in a vacuum. Despite the GOP having control of the Executive Branch, the House and the Senate in 2016, Trump still had a hard time getting his Tax Cuts and Jobs Act passed, which ended being the largest tax overhaul in three decades. So, whoever wins in November, don’t expect anything to happen until late 2021.
Would you like to explore specific tax strategies based on your own portfolio? Contact us today for a quick chat on your investments.
Recentric Realty Capital
Recentric continues to look for development and acquisition opportunities to meet the growing demand for larger, out-patient medical facilities. This strategy allows us to take advantage of the growing need for these facilities and offer new and exciting opportunities to our current and future investors.