WARNING! Biden's Tax Plan: The Investor's Worst Nightmare

[Joseph Medina]

IRS peeking into your income,  Realized Cap Gains Increase, UNREALIZED CAP-GAINS TAX, DEATH OF THE 1031 EXHANGE AND MORE!!! 

(I AM NO CPA AND THE FOLLOWING ARE MY VIEWS BASED ON MY INTREPRETATION OF THE ATTACHED DOCUMENT. THIS IS NOT ADVICE OF ANY SORT) 

So, ever since i started my REI i have obsessed over REI strategies and taxes. I absolutely hate the thought of putting in so much hard work to make a property desirable and when i sell it i have to pay a tax on it while the congress man who receives this money has a 500$/ month haircut stipend, and private parking, and other bulls*** benefits that my tax dollars pay for, so that that very congress man to only work 136 days out of the year and get paid a salary more than the average household income. (in my opinion i think public servants in roles like congress and etc should get paid what ever the median salary of the US employment market) and on top of that to have them spend the majority of those 136 days wheelin and dealin and arguing over s*** that leads them to not get anything done! I am an army OEF veteran and the young age of 32 i have lived a life greater than most of those congressmen will ever live in their unmoral lifetime (congressmen is gender neutral BTW.) rats get fat while brave men die!

Okay, so enough of the ranting i will touch more on the corporate stuff in next weeks 4-Horseman of The Economic Apocalypse: Employment

4-Horseman of The Economic Apocalypse: Inflation is here ----> https://www.biggerpockets.com/... 
4-Horseman of The Economic Apocalypse: Affordability is here ----> https://www.biggerpockets.com/...

So, what is the affect if this monstrous plan on RE Investors. 

1. REPEAL DEFERRAL OF GAIN FROM LIKE-KIND EXCHANGES

Well as the rumors have it, the 1031 exchange is on the "chopping block "as promised during his campaign.  

Actual PDF here ----> https://home.treasury.gov/syst...  

" Proposal
The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each
taxpayer ($1 million in the case of married individuals filing a joint return) each year for real
property exchanges that are like kind. Any gains from like-kind exchanges in excess of $500,000
(or $1 million in the case of married individuals filing a joint return) during a taxable year would
be recognized by the taxpayer in the year the taxpayer transfers the real property subject to the
exchange.
The proposal would be effective for exchanges completed in taxable years beginning after
December 31, 2021." 

This one is fairly straight forward. For any property or properties amounting or equaling 500,001$ or more in a taxable year the investor will be taxed. What tax? Well the way it reads is that you will probably be taxed at a Capital Gains Tax. The exact verbiage is... "The proposal would treat the exchanges of real property used in a trade or business (or held for investment) similarly to sales of real property, resulting in fewer distortions."  

This is almost ground shattering for some major players in the Multi-family space or Commercial Space. This is one benefit being ripped away from those guys. A lot of people complained about the 45/ 180 rule... well if its not carved out of the bill by congress it could get axed all together! 

2. Carried Interest as Ordinary Income and Syndicators taxed as Self-Employment Taxes 

"This one is dedicated to all of my syndicators and partnerships out there!!!" "TAX CARRIED (PROFITS) INTERESTS AS ORDINARY INCOME" 

The Actual verbiage is:

" The proposal would generally tax as ordinary income a partner’s share of income on an
“investment services partnership interest” (ISPI) in an investment partnership, regardless of the
character of the income at the partnership level, if the partner’s taxable income (from all sources)
exceeds $400,000. Accordingly, such income would not be eligible for the reduced rates that
apply to long-term capital gains. In addition, the proposal would require partners in such
83 General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals
investment partnerships to pay self-employment taxes on such income."

This particular section seems straight forward; however, if one reads the following paragraphs it gets complicated real quick and in a hurry! 

"To the extent (1) the partner who holds an ISPI contributes “invested capital” (which is generally money or other
property) to the partnership, and (2) such partner’s invested capital is a qualified capital interest
(which generally requires that (a) the partnership allocations to the invested capital be made in
the same manner as allocations to other capital interests held by partners who do not hold an ISPI
and (b) the allocations to these non-ISPI holders are significant), income attributable to the
invested capital would not be recharacterized."

" However, “invested capital” will not include contributed capital that is attributable to the
proceeds of any loan or advance made or guaranteed by any partner or the partnership (or any
person related to such persons)." 

I posted a few sections above are sections I have a hard time understanding and if anyone can help clear this up I and the community alike would be grateful...

3. "MAKE PERMANENT EXCESS BUSINESS LOSS LIMITATION OF NONCORPORATE TAXPAYERS" 

"The proposal would make permanent the section 461(l) excess business loss limitation on noncorporate taxpayers.
The proposal would be effective for taxable years beginning after December 31, 2026."

"The proposal would bring the tax treatment of losses from non-passive pass-through business
activities closer in line with the tax treatment of losses from corporations and passive passthrough business activities. Corporate losses do not flow through to individual owners. Instead, they are carried forward (or backward) to other taxable years to offset other income sources derived from the same business. Losses from passive pass-through business activities face somewhat less restrictive constraints. They may generally only be used to offset income derived from other passive pass-through
business activities. Generally, they may not offset other income sources, such as wage income" 


So, this one is interesting and kind of a slap in the face of some investors. So, as investors we take on risk and risk our own (most of the time) capital, and one of the benefits of this risk, is if the venture does not pan out successfully we can write off the loss against other forms of income. Now, this one has an effective date of 31- DEC-2026 (weird for sure). As it is kinda self explanatory what the are seeking to do by 01-Jan-2027 is to prevent investors from carrying over loses of pass-through businesses to other sources of income such as w-2 wages. So, if you're a professional investor this does not necessarily excuse you either. If you use your paper losses on your rental properties to off set other income from whatever other ventures you have this will be eliminated. If you own LLC A, B, and D, and property D is your money pit and LLC B is your cash cow you're no longer able to carry the losses from LLC D to offset your gain from LLC B. You're only allowed to to carry the loss from LLC D forward years and backward years to get a tax refund the current year you file. (kinda using your tax-returns as some sort of weird savings account as you wish)


4. REFORM THE TAXATION OF CAPITAL INCOME

 "Tax capital income for high-income earners at ordinary rates. Long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates, with 37 percent generally being the
highest rate (40.8 percent including the net investment income tax), but only to the extent that
the taxpayer’s income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022."

Basically, if you make any capital gains over 1 million you will jump from the 20-ish% tax range to the 37% ordinary tax range. so for you million dollar earners you're gonna fork up that 370,000$ to Uncle Sam for him to pi** away on something stupid or some social program that someone out there is abusing! 

"Treat transfers of appreciated property by gift or on death as realization events. (Basically Unrealized Capital Gains) 

Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital
gain at the time of the transfer."

@Brandon Turner has said on the BP podcasts a handful of times he set up properties for his children for their college fund, but the way this is written is that if he transfers the property to them at the time of their 18th birthday, he will be taxed at a Capital Gains Tax at the current market value. If he were to pass away his heirs would then be responsible for the capital gains tax if they were to sell it. Basically, the "Step-Up" program is eliminated. They also target trusts in this section basically saying if your property has not realized any gain loss event in the past 90 years on 31-Dec-2030 it will be the first event. The way it is written is that the trust itself (since trusts are considered stand alone entities) will be taxed at the capital gain rate. There is about 4-5 more paragraphs that outline exclusions if you wish to read them.   


5. ENHANCE ACCURACY OF TAX INFORMATION ( the bullet point you probably wanted to read) 

"The proposal would also treat ALL information returns subject to backup withholding similarly. Specifically, the IRS would be permitted to require payees of any reportable payments to furnish their TINs to payors under penalty of perjury."

" The intent of backup withholding is to serve as an enforcement tool in ensuring payors and payees are compliant with their reporting obligations. Requiring payees to certify their TINs to payors on a Form W-9 or equivalent form reduces the level of enforcement necessary to ensure information is accurate."

Now, the way I read this (and please if any CPAs here can clarify this i would be very grateful because this one has me really "spooled up") is that for any transaction made payable to you over 600$, as a business or person, will be required to file a W-9 form with your Taxpayer Identification Number (TIN) if you don't then you are committing perjury. 

I included the actual document above and here (https://home.treasury.gov/syst...) so that way i try not to misinform you guys. Yes, i kinda cherry picked some of the most relevant information to put on here. But, if you want to read the document yourself, again, it attached. If you're a CPA and see any discrepancies or disparities in my interpretations please let me know.