Real Estate Investors Face Yet Another Tax Threat

There are plenty of CRE tax worries to go around these days, from the potential elimination of the 1031 exchange break to the attempt to end all carried interest.

Now there’s a new twist that some lawyers noticed in the American Families Plan fact sheet that the White House put out. It isn’t something explicitly stated, but more between and even inside the lines. The target is the “loophole that allows the wealthiest Americans to entirely escape tax on their wealth by passing it down to heirs.”

President Biden wants to “close this loophole, ending the practice of ‘stepping-up’ the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity.”

The White House claims that there will be protections “so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.”

However, what happens to real estate not left to a charity and which isn’t a family-owned business or farm? The result, as Ken Weissenberg, a tax partner and co-leader of EisnerAmper’s national real estate practice tells GlobeSt.com, is “not just tax the rich; it’s attack the rich.”

“If somebody has stock and it’s worth a million and the stock basis is zero and [the heirs] have to pay $250,000 or $400,000 on the gain, the stock is still worth $1 million and is liquid,” Weissenberg says. “The net equity might be worth $20 million, but the gain might be $50 million or $60 million or higher.”

However, with real estate, the disposition can be far more complicated. Weissenberg posits that a taxpayer bought property for $10 million: $5 million in cash and a $5 million mortgage. Over time, the property increases in value to $40 million. The taxpayer has used financing to take money out and use it to buy other assets.

“That’s now also taxable,” Weissenberg says. But the value of the property is still $40 million. “You’d have a piece of property that’s not worth what the taxes are.” And as the other assets are also taxed, the result could be double taxation.

“[Biden] says he’s going to end the step up in basis, and then he says we’re going to make sure the gains are taxed if the property doesn’t go to a charity,” Louis Vlahos, a general partner at Rivkin Radler, tells GlobeSt.com. “There’s something implicit in there that we’re going to tax things at death.”

“This is something that is intended to get people’s attention so politically he can say here’s what I tried to do and fought for it,” Vlahos says, calling it a “total mess.”

From a political view, Democrats could run it through a reconciliation process, as was done with the 2017 Tax Cuts and Jobs Act, and they still have two available. Getting enough votes, including moderate and more conservative Democrats in the Senate, would be a challenge. But there is no need for 60 votes to close debate, making such a move at least possible.