Proposed Tax Increases for Real Estate

There has been a lot of discussion recently about raising taxes for people who own real estate.  No bills have been passed, but it is important for real estate investors to know what is being discussed and to understand the potential impact of the suggested tax changes.




In 2014, committees in both the Senate and the House proposed eliminating 1031 exchanges, and the administration’s budget for 2015 proposed limiting the amount of gain that can be deferred in an exchange to $1 million per taxpayer per year.  As mentioned earlier, no bills have been passed and using a 1031 exchange to defer tax on the sale of real estate is still a significant benefit available to investors. 




This year the administration presented a proposed budget that included raising the capital gains rate. 


Currently the highest capital gains tax rate is 20%, which applies to taxpayers with income that exceeds $400,000 ($450,000 for married taxpayers filing jointly).  Investors also have to consider that many states have income tax which can add as much as 10% of additional tax.  In addition, to the extent that a taxpayer has more than $200,000 of income ($250,000 for married taxpayers filing jointly), they have to pay net investment income tax (Medicare tax) at the rate of 3.8% on the gain.  The administration’s proposed budget would increase the capital gains rate to 28% (inclusive of the net investment income tax).  Federal and state capital gains tax and net investment income tax due upon the sale of real estate can all be deferred in a 1031 exchange. 




When someone dies, their heirs inherit the real estate they owned with a “stepped up basis.”  No tax is due at that time on the gain based on the difference in value between when the decedent acquired the property and the time of death, although estate tax may be due.  An heir will only need to pay capital gains tax on any gain that happens after the date they inherit the property.  The administration has proposed eliminating this tax benefit.  Eliminating the step up in basis would require that capital gains tax be paid upon death even if estate tax is also due.  As proposed, the step up in basis wouldn’t apply to the first $100,000 of gain ($200,000 for married couples filing jointly) or to $250,000 of gain from the sale of a personal residence ($500,000 for married couples filing jointly). 


These are all proposals, and no one knows whether any of them will become law in their current or a modified form.  Tax-deferred exchanges continue to be a great benefit for real estate investors, and we would welcome the opportunity to talk to you about your plans to exchange your properties.