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Updated about 4 years ago on . Most recent reply

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Collin Hays
#2 Short-Term & Vacation Rental Discussions Contributor
  • Property Manager
  • Gatlinburg, TN
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Impact of Biden tax plan on STR investing?

Collin Hays
#2 Short-Term & Vacation Rental Discussions Contributor
  • Property Manager
  • Gatlinburg, TN
Posted

With a Biden Presidency, taxes on on everyone making $400K a year are going up.  There is speculation that the "only" 20 percent capital gains tax will go up, and in fact, for folks making $400K a year, capital gains tax will revert to ordinary income tax which could be as high as 40 percent.

"But I don't make $400K a year". Well, if you sell a STR for $400K and your basis is $200K, you are likely now in the top bracket for that year, when you combine that gain with your personal income.

Number one, what does everyone think the practical effect on STR investing will be, if any? More demand? Less? Higher prices? Lower?

As I navigate this for myself, my strategy is simply "don't sell, but refinance".    In other words, in the low interest rate environment, rather than selling a unit for big gains, I'll just do a 75% cash-out refinance and service a 3% loan.  The loan obviously isn't capital gains or income.   

Example: I have a property that is likely worth $550K FMV today that produces about $60K a year in top line rents. My basis is around $280K. If I sold it, I would have a capital gain of $270K. Under the Biden plan, my taxes on that would likely be in the $100K range.

Instead of selling, I would do a cash-out refi: A new loan of around $450K @ 3.25% APR. So I get $450K out of the property through a "loan", thereby avoiding capital gains tax, and the rental income now services the debt (plus quite a bit more actually).

But my overriding question is, "What effect on STR investing will the Biden taxes have?"

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SMOKY MOUNTAIN FALLS INC.

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Julie McCoy
  • Real Estate Agent
  • Sevierville, TN
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Julie McCoy
  • Real Estate Agent
  • Sevierville, TN
Replied

@Collin Hays The most straightforward way to avoid a tax hit on a property sale is to either do a 1031 exchange or invest the gains in an opportunity zone or other tax-deferred investment.  I know Biden has floated the idea of eliminating the 1031 exchange, but until that actually happens (I think there would be VERY strong headwinds against this) I am going to continue utilizing it.

If you're fine with holding the property, yeah, cash-out refi or a line of credit is the way to go, but that doesn't address the question of gains when the property sells. I believe there are certain limitations on this, so check with your tax professional, but if you were to do a cash-out refi for the maximum available amount (let's say 75% LTV) and then turn around and sell the property, your gain would be approximately 25% - which would be a better tax outcome than if you had a gain of 50%. However, I believe the IRS frowns on cash-out refis and then selling a property quickly thereafter, so definitely something you want to do with professional advice.

Outcome for the STR market? Savvy real estate investors have a plethora of tax benefits they can take advantage of, and while any new tax regulations will prompt adjustments to strategies, I have every confidence that this will continue to be one of the most tax-advantaged means to generate income. Real estate investors will continue to utilize the 1031 exchange and that will eliminate most concerns about taxes on income.

Until there's a more concrete idea of what any new tax law will actually look like, I don't anticipate any changes to the market, and once we have that there will be new strategies born.  

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