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The CRE Industry is Battling Back Against Proposed Tax Reforms

Anchin in the News May 17, 2021Originally Published By WealthManagement.com
Anchin Partner Mentioned: Mark Schneider

The CRE Industry is Battling Back Against Proposed Tax Reforms

Legislation still taking shape

1031 exchanges have been on the chopping block before. What is making people in the commercial real estate industry nervous now is the high levels of government spending. President Biden is hoping to use tax increases to help pay for American Families Plan and the American Jobs Plan. Yet even with Democratic control in Congress, legislation will not have an easy path ahead to get the majority vote needed at least as they are currently written. Several Senate Democrats have signaled they do not support all the tax increase proposals. For example, members of the Senate Finance Committee Joe Manchin (D-WV), Mark Warner (D-VA) and Bob Menendez (D-NJ)—are among those that have voiced concerns that higher capital gains rates could slow economic growth, according to The Wall Street Journal. 

The four tax issues that the commercial real estate industry is watching closely are: 

  • A limit of $500,000 on the capital gain allowed to be deferred under a 1031 exchange. Anything over that amount would be subject to capital gains tax and depreciation recapture.
  • An increase in the capital gains tax rate for the highest income bracket from 20 percent to an ordinary income rate, which Biden also proposes to increase from 37 percent to 39.6 percent effectively doubling the capital gains tax rate for individuals with taxable income over $1 million.
  • Stepped-up basis: Taxing unrealized gains in excess of $1 million ($2.5 million per couple) at death, but with an exception for family-owned businesses passed on to heirs who continue to run the business. (American Families Plan Fact Sheet)
  • Higher tax rate on carried interest for private equity and hedge funds. Although this will mean a higher tax rate for carried interests held more than three years, effectively it is a bit of a non-issue if Biden succeeds in raising the capital gains tax rate to 39.6 percent, which would be the same as the highest individual income rate.  

“This is Biden’s first cut at it. So, we will see what sticks and what doesn’t,” says Mark Schneider, CPA, tax partner and leader of the Real Estate Group at Anchin, a tax and advisory firm based in New York City. Of these four provisions, the toughest one to pass is likely going to be raising the capital gains tax rate from 20 percent to 39.6 percent, in part because that is a big jump. Biden may be willing to compromise on that number to get the support he needs, but it is likely too soon to tell how this plays out, notes Schneider.

Read the full article on WealthManagement.com

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