Biden to abolish capital-gains tax loophole for real estate investors
by Candyd Mendoza, 29 Apr 2021 Via Mortgage Professional America
President Biden is pushing to close a tax loophole that has allowed real estate investors to defer paying capital gains on property sales as part of his $1.8 trillion spending package for new social programs.
The Biden Administration said that the proposed economic plan would eliminate a tax break, known as 1031 exchanges, on real estate profits of more than $500,000. The tax treatment enables property investors to reinvest the proceeds of sales into future purchases without paying capital gains taxes on profits.
The tax cut also applies to resident also extends to residential sales. Home sellers can defer capital gains by rolling the sales proceeds in a home other than their primary residence. The proposal would continue to allow 1031 exchanges of less than $500,000.
The White House said that the reform would be designed with “explicit protections so that family-owned businesses and farms will not have to pay taxes when they give — when given to heirs who continue to run those businesses.”
Theoretically, investors can continue this deferral process until they die. The loophole allows them to entirely avoid income taxes on their gains by passing them on to their heirs at death.
“By equalizing the treatment of capital gains and ordinary income, this plan would also eliminate the so-called ‘carried interest loophole,’ which allows private equity managers to report their earned income as carried interest and enjoy lower capital gains rates,” a senior administration official from the White House said in a statement.
The tax break would save property investors more than $41.4 billion between 2020 and 2024, the Congress’s Joint Committee on Taxation (JCT) estimated.
The biggest beneficiaries of the 1031 tax changes are individuals rather than big corporations. According to a JCT report, corporations will gain $2.3 billion while individuals will yield $5.7 billion. The move will also enhance the government’s ability to rate and raise revenue from capital gains from 20% to 39.6%.
“The basic logic for these last two changes is about rewarding work in our tax code and not just wealth – something that the President has spoken to on the campaign consistently. The conceptual framework for equalizing the tax treatment of capital gains and ordinary income is neither new nor novel. It was a key feature of President Reagan’s tax reform where he increased capital gains rate to match the personal income tax rate.
So those are the key elements of the tax reforms that the President will be proposing alongside the American Families Plan – to lay out a framework for how to make these critical investments in our future economic competitiveness in a way that is fiscally sound,” the White House said.
Full Article by Candyd Mendoza: https://www.mpamag.com/news/biden-to-abolish-capitalgains-tax-loophole-for-real-estate-investors-253650.aspx?utm_source=GA&utm_medium=20210429&utm_campaign=MPAmW-Breaking-20210429&utm_content=C8038DFC-E6EE-4513-8540-44761C4A4E0D&tu=C8038DFC-E6EE-4513-8540-44761C4A4E0D