Capital Gains Tax Doubled??

Capital Gains tax.

A Bad word may just get even worse!  Remember…..Capital Gains for a primary residence are different from those for second homes or rental (income property).

Gains are the dollar amount received for the asset less your cost basis. Your cost basis includes not only the value of the asset when acquired, but also any costs to acquire the asset, such as commissions, major updates etc.

For this purpose we are talking about Gains on a property other than your primary residence.

So what is going on with Capital Gains? How does it affect me?

One significant tax change for investors (like yourself) if Bidens tax reform is passed is the proposed change to capital gain tax rates.  Currently, long-term capital gains are taxed at preferential rates in comparison to income tax rates.  The maximum rate is 20% compared to the top ordinary income rate of 37%.  The Biden Tax Plan would leave this 20% rate in effect, but only on incomes up to $1,000,000.  But wait…. you don’t make $1,000,000 a year so this doesn’t include you??

Don’t be so sure! Keep reading.

Once an individual has income in excess of this proposed cap, capital gains would be taxed as ordinary income – Biden’s new proposed 39.6% rate plus NIIT (Net Investment Income Tax) if applicable, is added in, this rate then jumps to 43.4%. Almost HALF of your hard earned investment Gone! Ouch.

Here is the catch.

With home values skyrocketing in the California market, a home sale could bump some sellers over the $1 million income threshold for the year. This is especially true if the seller originally purchased the home/investment property during a down market, such as during the financial crisis of 2007-’08, when home values in many areas plummeted or if your investment property is paid off. You get the idea.
This change could have a huge impact on net cash proceeds remaining after the sale for retirement or further reinvestment. 
Basically You may get burned when you keep a home as a rental property and sell it later on.

1031 tax exchange protection terminated?

Our current administration is proposing to eliminate the ability for wealthy taxpayers (assumedly, those with incomes over $400,000) Ha Ha Ha…. to utilize the tax tool known as the Like Kind Exchange, or 1031 transaction.  A 1031 transaction allows a taxpayer to defer payment of tax on the gain from sale of a property by ‘exchanging’ it directly for another. The basis in the original property is carried over to the exchanged property in order to preserve the gain, but no gain is recognized until the final property is actually sold.  This tool has been used by real estate investors for decades because it allows them to sell a property and maintain control of 100% of their proceeds from sale instead of paying tax, resulting in a lot more money for their next property.

The Biden Tax Plan and other proposals, if passed will have a significant impact on the world of real estate investment, including the tax rates that will be paid, tax deferrals options, and investment incentive programs.  If passed, all investors will need to pay attention to how these changes might impact you, your strategy, or the potential to pursue other investment options.


Now may be the time to take advantage of this crazy “hot” Seller market and the current tax rates, with the ability to defer your hard earned capital before it all changes!!