News Brief: Biden's Proposed Tax Hikes
President Biden is proposing a $1.8 trillion spending bill aimed at improving education, childcare and healthcare; and he is targeting wealthy Americans to foot the bill.
President Biden’s $1.8 trillion spending bill, named The American Families Plan, is aimed at extending tax credits to low- to moderate-income workers, providing two years of free community college to all Americans, and establishing a national medical leave program. To foot the bill, the plan includes a proposal to increase taxes on Americans with high incomes and/or highly appreciated assets.
Below is an overview of the proposed tax changes that could have the biggest impact on commercial real estate.
Increase Long-Term Capital Gains to 39.6%.
Proposes to increase the top, long-term capital gains rate to 39.6% (compared to 20% currently) for individuals with taxable incomes above $1 million. This would result in a top marginal rate of 43.4% after including the 3.8% Net Investment Income Tax. Historically, the top capital gains rate has held between 20% to 28%; though it did range between 32.2% to 39.8% in the 1970s and dropped to between 15% to 16.05% from 2004 to 2012.
Eliminate the Stepped-up Basis.
Proposes to tax any unrealized gains greater than $1 million ($2.5 million for joint filers), upon the date of death. This change would effectively eliminate the century old tax code that allows the basis of inherited assets to be “stepped-up” to their fair market value as of the date of decedent’s death. This new tax could reach as high as 43.4% (after including the 3.8% NIIT) for individuals with taxable incomes above $1 million. Taxes could still be deferred on assets transferred to a surviving spouse until the sale of the asset or the death of the surviving spouse. Assets donated to charity would be exempt, as well as family-owned businesses and farms for as long as the heirs continue to run the business.
Scale Back the 1031 Exchange.
Proposes to eliminate investors’ ability to defer taxes through like-kind exchanges on any gains greater than $500,000. Investors are currently required to follow strict procedures and timeliness to defer taxes via a 1031 “like-kind” exchange; however, there is no limit on the amount of gain that can be deferred. Like-kind exchanges have been part of the US tax code since 1921.
Extend the 3.8% Net Investment Income Tax.
Proposes to extend the 3.8% Net Investment Income Tax (NIIT) to include all pass-through business income over $400,000. Under current law, limited partners and S-corporation owners are protected from this additional tax if they are actively involved in the business. The Net Investment Income Tax was enacted in 2013.
Increase Top Federal Income Tax Rate to 39.6%.
Proposes to increase the top marginal income tax rate back up to 39.6%. The top rate would apply to taxable incomes over $452,700 (single filers) and $509,300 (joint filers). The 39.6% rate would match the top rate from 2013 – 2017 and for most of the 1990s, but would be an increase from the current 37% rate and the 35% top rate from 2003 to 2012.
Impact to Commercial Real Estate
Many of these long-standing tax codes help drive a significant amount of capital into commercial real estate – a critical component of the U.S. economy – making it logical to assume that scaling them back or eliminating them altogether, would likely have a negative, near-term impact on both commercial real estate and the economy.
For example, the ability to defer taxes through a 1031 exchange is a key driver of capital into the development, exchange, and improvement of commercial properties. This continual exchange of capital, likewise, drives jobs and taxable income for attorneys, accountants, appraisers, analysts, architects, engineers, contractors, laborers, building inspectors, local governments, and many other professions.
Eliminating a key driver like the 1031 exchange could diminish the flow of capital into commercial real estate, and conversely, diminish jobs and taxable income across numerous industries.
Will It Get Approved?
The plan itself is very ambitious, and the $1.8 trillion price tag is a massive number, especially when considering the president’s other $1.2 trillion spending plan for infrastructure that was initially proposed at $2 trillion.
Most political analysts believe the $1.8 trillion American Families Plan will be very challenging to pass as currently proposed even with the possibility of congressional Democrats using the budget reconciliation process to get around needing a three-fifths majority. Increasing taxes, particularly on individuals, is a politically challenging process that will likely involve many compromises before any final legislation is approved.
Sources: Tax Policy Center, Wall Street Journal, The Washington Post, Forbes, New York Times, IRS.gov;
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty, or guaranty, express or implied, may be made as to the accuracy or reliability of the information contained herein.
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