How Biden’s Tax Plan Can Affect Investors

Video Index (with direct links)
0:00 Happy Veteran’s Day and Prop 15 fails to pass
0:39 Biden’s Tax Plan
3:54 Nationwide Coronavirus news
4:24 Coronavirus vaccine
5:22 Eviction resource for landlords

Hello Investors!

For all veterans reading, Happy Veterans Day, and thank you for your service to our country!

Proposition 15 Does Not Pass

Thank you for voting down Prop 15!  If Prop 15 had passed, many commercial properties would have had their taxes reassessed every three years, leading to higher property taxes, and higher prices to customers.  Although technically, the voting is not complete, there appears to be a pretty comfortable margin for the Proposition to not pass.  So, our property taxes are safe…for now.

Joe Biden’s Tax Plan

All of the major media outlets have announced that Joe Biden will be the next President of the United States.  Let’s talk about a few of the items on Biden’s tax plan that could affect real estate investors.  But before I go into those further, it’s important to note that these are ideas that he mentioned back in July when first unveiled his “caring economy” plan.

However, the President won’t have the power to pass these bills into law without the support of Congress.  The House of Representatives is controlled by the Democrats, but control of the Senate won’t be decided until January, when two runoff elections in Georgia will determine who wins those senate seats.  If Georgia stays under Republican control, then Biden may have difficulty getting some of his tax plans turned into law.

Elimination of the 1031 Exchange

The first potential big change is the elimination of the 1031 exchange.  A 1031 Exchange allows an investor to defer capital gains on the sale of an investment property, using the gains to purchase another property of equal or greater value without paying tax.  The 1031 Exchange is a critical component of investment real estate, and a significant percentage of transactions that took place in 2020 since the pandemic were exchange driven, by investors who sold a property and wanted to exchange into another.

Elimination of the Step Up in Basis Rule

He has also discussed eliminating the step up in basis rule for inherited property.  Basically, the step up in basis allows someone to inherit a property and receive a higher, or stepped up, tax basis on that property.  The basis is the number used as the original price, when calculating profit.  So if a dad owns a property and passes away, his son could receive the property, get a step up in basis, and sell the property right away and pay no tax on the profit when selling the property.  So what some families have been doing is combining this strategy with the 1031 exchange strategy.  One person can continuing to exchange smaller properties for larger and larger properties, and continuing to defer the gains, and then when he passes away, his or her kids can get the step up in basis and sell the property without paying any taxes.  These two strategies, which often go hand in hand, are things that Biden is looking to eliminate.

Repeal of State and Local Tax Deduction Cap

Next is the potential repeal of the State and Local Tax deduction cap.  The 2017 Tax Cuts and Jobs act allowed taxpayers to deduct only a maximum of up to $10,000 from your federal income taxes.   Biden has mentioned that one of his goals is to repeal this cap.  This would benefit people in areas that have high property taxes and income taxes.  Hmm, yeah, like California.

Increase the Top Tax Bracket to 39.6%

Biden also wants to raise the top tax bracket from 37% to 39.6 percent.  So the very high earners would be paying a bit more in federal income tax.

Higher Tax on Long Term Capital Gains for High Earners

In addition, Biden would also change how long term capital gains are taxed for higher earners.  – this is for people earning over $1MM a year.  So if you do make that much, then your capital gains could get taxed at the regular income tax rate, which would be 39.6% under his new tax bracket structure, rather than the 20% that high earners are paying now.

These are just a few of the proposed changes to his tax plan.  What else could we expect to see early on in the Presidency?  One thing that we can expect to see is a new stimulus package.  Another stimulus package has been debated for months, and Biden has made it clear that it is a top priority for him.  So if the next stimulus package doesn’t get passed by Trump before the end of this year, look for one early next year.

Coronavirus Update

The other issue that we can’t ignore is what is happening around the US and around the world with Coronavirus.  We are now eight months into the pandemic, and we are seeing record case counts and record hospitalizations every day.  More cold weather ahead means that more people will be staying indoors, giving the virus more opportunity to easily spread. measures retail traffic by monitoring your movement based on cell phone activity.  And at the end of October, they noted that retail traffic was at its lowest since May 4.

Pfizer Announces a Coronavirus Vaccine that is 90% Effective

On Monday, Pfizer, announced that clinical trials proved that they have a vaccine that is 90% effective in preventing COVID-19.  This is amazing since most vaccines are only 65% effective.  That explains why I get the flu shot every year but still get sick.  So this appears to be a lot better than a flu shot.  Pfizer says up to 50 million doses could be available globally. by the end of the year, with 1.3 billion available in 2021.

The stock market responded very positively to the news, with many stocks way up on Monday – mostly stocks for companies that we hope to be patronizing again in the near future – AMC Theaters, Dave and Busters, and Simon Property Group, to name a few.

The stocks that did not do well on Monday are the stay-at-home stocks that have thrived during the pandemic – like Peloton, Zoom, and Netflix.  What happened on Monday in the stock market seemed like a bit of an overreaction, as some of those stocks reversed their trajectories on Tuesday.  But in any case, as you can see, the stock market’s reaction is truly a barometer of the public’s emotions, and we can expect more volatility in the future, when we see more vaccines released, and when we see the actual real world results of the vaccines.

What Are the Eviction Laws in Your Jurisdiction?

I wanted to share a resource from Nolo Law, which tracks eviction rules by jurisdiction.  If you aren’t sure what the eviction rules are in your area, or if you can legally evict a tenant, check out this link.

Hope you enjoyed this newsletter.  See you next time!

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Mike Lin, CRE