What Does Real Estate Investing Look Like Under Biden?
If you paid attention in school, you would have learned that America’s true start came in 1773 with the Boston Tea Party.
That’s right. America was founded on a tax revolt. Tired of paying taxes on tea, the patriots threw the tea into the water. This eventually led to the Revolutionary War in 1776.
I’m not sure when so many in this country fell in love with paying taxes, but the reality is that the DNA of America is to pay as little taxes as possible. Paying taxes is not patriotic. Taxes are theft. The reason why the rich, people like me, hate taxes is because when you give a bureaucrat money, all they do is spend. Our country is massively in debt and they still want more.
The reason is that government leaders learned a long time ago that the tax codes could be used to make people and businesses do what they want by utilizing the tax code.
In short, the many credits and breaks that are found in the tax code are there precisely because the government wants you to take advantage of them.
For instance, the government wants cheap housing. Because of this, there are many tax credits for affordable housing that developers and investors can take advantage of that minimize their tax liability, put more money in their pocket, and in turn, create affordable housing. Everyone wins. I would rather invest my money in affordable housing than give it to a bureaucrat.
There are many scenarios like this in the tax code that incentivize investors and entrepreneurs to do activities the government is looking for while rewarding those who take those actions with a lower-or zero-tax burden.
Because of this, limiting your tax liability actually means you’re doing what the government wants you to do through the tax code. And that is the most patriotic thing you can do.
When it comes to conversations like this, most people appeal to some sense of justice. It’s not fair, they cry, that the rich get to make the rules when it comes to taxes. It’s unjust, they say, that the rich can avoid paying taxes while the middle class and the poor are stuck with the bill.
I agree, it’s not fair. But as my father (and probably your father) said, “Life isn’t fair.”
The Challenges Of The New Administration
In 2017, I cheered when President Trump signed into law his tax plan that rewarded business owners and real estate investors with tax breaks. He was incentivizing more people to do what the government wants.
Now, as we are just weeks away from 2021, and it looks like Trump’s tax cuts could get cut as Biden heads to the White House.
The idea of the wealthy “paying their fair share” will come to fruition with Joe Biden leading the country.
Here are a few highlights of Biden’s tax plan:
- Increase the corporate tax rate from 21% to 28%
- Increase the tax rate of higher-income individuals from 37% to 39.6%
- Taxation of capital gains would increase from 23.8% to 39.6%
- High-income owners of pass-through businesses that don’t pay the corporate tax would lose the break they got in 2017.
So what does this have to do with real estate? Simply, if Biden raises taxes as he’s proposed, investors stop borrowing, and the banks stop lending, which will lead to a crash and probably the next depression.
Tax Increases On Homeownership & Capital Gains
Real estate has been in a bull market for a couple of years now, and many homeowners are looking at the value of their house and seeing a rise to pre-2008 levels. Ken McElroy, my advisor on real estate, calls these people “house rich and cash poor.”
He also says, “Along with income tax increases, another thing to look out for is raising the taxation on capital gains income. Biden’s tax proposal may make you start thinking about accelerating the acknowledgment of capital gains. Even if it doesn’t happen under Biden, rising capital gains are bound to happen soon.”
Right now, your personal home gets a capital gains exclusion on the first $250,000 if you are single and $500,000 if you are married. The average person doesn’t have to worry about this but what Ken is warning about is the potential for this to change in a Biden Presidency.
Ken says to avoid being trapped by capital gains consider a 1031 exchange, “With a 1031 exchange, one can sell a property and defer those gains into another property. If those policies are taken away, the real estate market may be hurt which may, in turn, hurt businesses. However, it is believed that this is less likely to be affected by the new administration.”
What Can You Do To Prepare?
I don’t care who you are, taxes are your largest single expense.
Learn how different types of incomes are taxed and how you can avoid the tax increase trap.
Second, Ken advises, “Consider recognizing capital gains, holding off on cost segregation studies on depreciative assets, converting some of your income from W-2 income to other types of income that aren’t subject to additional social security taxes, considering gifting assets now if you are above the exemption threshold, holding off on buying a home if you’re a first-time homebuyer, and start doing research into more lucrative retirement plans. The main thing is to focus on capital gains and hope that the government gives time for you to prepare for these major changes in real estate and taxation.”
With education, your knowledge increases and your risk decreases.
Taxes are a great example of this. As a person’s knowledge about taxes increases, their risk of overpaying their tax decreases as does the risk of incurring penalties and interest.
Editor, Rich Dad Poor Dad Daily