In 2017, the Tax Cuts and Jobs Act pared back many corporate and personal taxes. Often incorrectly referred to as a product of Trump, but really a long-term Republican wish list, the measure faces criticism from Democrats of putting too much money into the pockets of too few.
Now a Democrat-led Congress is looking to push back on the changes, closing tax strategies for the wealthy and increasing corporate taxes. But in the face of Republican opposition in the Senate that could sink any measures outside of a reconciliation process and clear intra-party disagreement over strategy, what might happen is unclear.
“I think what we’re going to see in this proposal is a lot of compromise,” Jeff Bowden, tax principal at Anchin Block & Anchin, tells GlobeSt.com. “[Taxes are] going to go up. The question is how much it’s going to go up and how we’re going to get a compromise.”
Bowden points to some ways real estate professionals might feel the pinch:
- There’s a push to increase capital gains taxes. Although the Biden administration wanted a top rate equal to the highest ordinary income level, House Ways and Means Committee chair Richard Neal, who has considerable power, has suggested a 25% level. But there’s a catch in the next point.
- That 25% level doesn’t include the 3.8% Affordable Care Act surcharge on capital gains. (The extra 3.8% only applies if the rental income is more than $500K). “It seems to state that real estate right now, if you have rental real estate income and you’re a real estate professional, it’s not subject to the 3.8% ACA tax,” Bowden says. The current proposed language would eliminate that exclusion, so the top capital gains rate on real estate rental income would be 28.8%.
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Real estate is generally not subject to current carried interest legislation. The wording of the proposed legislation seems to include real estate under carried interest and, for all carried interest, requires a holding period of at least five years. Given the sharp escalation of prices, you’d have to consider whether the increased profit on something acquired more recently would outweigh the additional tax.
- Bowden couldn’t find any language on a stepped-up basis, which would mean that the ability for an investor’s heirs to avoid taxes by stepping up basis and showing no capital gains on inheritance could remain.
- “There was a lot of talk of removing the SALT cap,” Bowden says. “That’s not in the bill.” But he notes that multiple states have found their own runarounds.
- In the original legislation, there was a 20% additional deduction on qualified income for a pass-through entity. “Now in this bill there’s language to cap everything at $400K for an individual, $500K for couples.” That could mean an approximately 9% increase.
Although the proposed changes would go into effect after December 31, 2021, any changes are far from finished. They’d also need to go through the Senate reconciliation process, likely as part of the big proposed spending bill. But the future of that measure is in doubt because of congressional fighting among Democrats. Without that path, it’s highly unlikely any of this would pass.