How Biden’s Tax Plan Can Affect Your Real Estate Investments



I was a professional real estate investor even before the Great Financial Crisis and saw almost everything: markets that go up and down, trends that disappear rather than consolidate and remain, and, of course, changes in political leadership that lead to new changes … tax policy.

We now have President Biden in the White House, and we see his proclamations and political positions. Let’s take an objective look at the administration’s guidance and what could happen this year with potential implications for investment property.

First, the economy At the moment on fire. US GDP May Over 6% This Year, reports The Conference Board. Of course, the recovery is uneven and Covid remains a significant factor globally. But I note macroeconomics because at my firm we believe there is no better indicator of potential investment property demand. As the economy expands, demand increases, generally speaking, for profitable real estate occupied by business users and multi-unit real estate that provides people with housing for rent.

Stay tuned for changes in Capital Gains Taxes and Exchange 1031

In terms of tax policy, the Biden administration is now offering several proposals that could affect real estate investment: an increase in the capital gains tax rate and a limit on the use of 1,031 similar exchanges. (Essentially, Exchange 1031 allows real estate investors to defer capital gains and other taxes on investment gains when they reinvest the proceeds in other investment property.) Biden suggested increase in the capital gains tax rate to 39.6% for people earning over $ 1 million a year.

My hope – shared by many others – is that the capital gains tax rate will not be increased. I believe that a favorable capital gains tax rate contributes to exactly this – capital investment. But suppose the rate is increasing: how will this affect real estate investment? Generally speaking, this would potentially reduce profitability, but it would also reduce the profitability of all types of investments, including the sale of stocks, bonds and other assets. So any blow to your investment property portfolio will not be pleasant, but it can be proportionate.

In this environment, the reasons for diversifying a portfolio of stocks, bonds and alternative investments, including real estate, will be the same as now: to try to reduce risk by owning various assets, including hard assets, but that is not all. correlates with the stock market. We remind you that investment property does not rise or fall along with the stock market as a class. And there is potential for income (positive cash flow) in addition to potential gains. There are other tax benefits to investing in real estate, including depreciation and amortization to help maintain income.

Is it worth selling investment property now?

In the short term, some real estate investors may be wondering, “Should I sell now to stay ahead of any changes in the capital gains tax rate?” The simple answer is maybe. There is no one-size-fits-all answer. It depends on your individual situation and the property you own. If its value is well preserved during the pandemic and you need to sell, it might make sense. If the cost has decreased, but a rebound is expected, and revenue is not needed now, it may make sense to wait. Of course, check with your tax or legal advisor when considering options, because everyone’s situation is different.

Biden also proposed cutting the use of 1,031 such exchanges. To be clear: he did not suggest eliminating them, but limited their use. In the administration’s budget, released in late May, there is a proposal to limit the amount of capital gains from the sale of investment property that can be deferred to $ 500,000 per year for individuals and $ 1 million per year for married couples. (Today, there is no cap on the amount of capital gains from the sale of investment property that can be protected using the 1,031 exchanges.)

Notably, 1,031 exchanges provide many benefits for the real estate market and the national economy, including facilitating the reallocation of investment capital into more productive assets. They are also very popular with property owners, including family farm owners and owners of small rental houses and tenements that help create wealth.

DSTs Can Become Even More Attractive

If the use of the 1031s becomes limited, one investment vehicle is likely to become even more attractive: Delaware State Legislature (Summer time). DST is a form of fractional ownership of real estate that is eligible 1031, unlike many other co-investment real estate structures. DSTs can be a great way to invest in real estate, including an important part of your diversification strategy.

I mention them because DST interest rates have relatively low minimum investment amounts – typically $ 100,000 – so the corresponding returns could be below any new thresholds that might be set to qualify for the 1031 tax regime. In addition, many investors hold shares in several DSTs as a diversification strategy. Thus, if an investor’s real estate investment is in multiple DSTs with different sale dates, the one-year profit could potentially not exceed any limit that could be imposed to qualify for 1031 tax deferrals. To learn more about DSTs and how they can be used in exchange 1031, visit

One strategy investors are currently considering

Many investors are considering selling larger blocks of real estate now and swapping 1,031 for a series of Delaware equity investments at lower prices to potentially protect themselves from 1,031 exchange restrictions in the future. For example, if an investor had a $ 3 million property that he sold and traded for six different DST investments in $ 500,000 increments, he would potentially be determined to continue to delay making a profit through 1,031 exchanges in the future, even if the restrictions proposed by Biden. administrations take effect. This is also due to the fact that each DST has its own business plan and schedule, with the sale of real estate likely to occur at different times and in different years in the future.

What will happen on these federal tax policy issues this year? Nothing or something else – nobody knows for sure. Meanwhile, investment property owners and investors must make the best decisions they can today with what we know now, recognizing that regardless of tax policy, real estate is likely to remain an attractive asset class for many investors interested in diversifying and striving for diversification. income and appreciation. As always, diversification does not guarantee profits or protect against losses, and income and value gains are never guaranteed by any investment.

This material does not constitute an offer to sell or a solicitation to buy any security. There are significant risks associated with investing in real estate securities, including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning / operating commercial and multi-family property, financial risks, potential adverse tax consequences. , general economic risks, development risks and long periods of storage. There is a risk of losing the entire principal of the investment. Past performance is not a guarantee of future performance. Cash flow potential, profit potential and potential appreciation are not guaranteed. Securities offered through Growth Capital Services, a FINRA member, SIPC, Office of the Supervisory Jurisdiction, located at 582 Market Street, Suite 300, San Francisco, CA 94104.

Founder and CEO of Kay Properties and Investments, LLC

Dwight Kay is the founder and CEO of Kay Properties and Investments LLC. Kay Properties is the national 1031 investment exchange. The platform provides market access with 1,031 exchange items, 1,031 exchange items available only to Kay customers, independent consultations on sponsoring companies, full due diligence and validation of every 1031 exchange offer (typically 20-40 offers) and 1031 aftermarket.


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