Proposed Tax Changes (and Planning Strategies) Under the Biden Administration Part 2: Capital Gains
March 23, 2021
As a follow up to our previous post,
Proposed Tax Changes (And Planning Strategies)
Under The Biden Administration – Part 1: Ordinary Income , we laid out four main topics of discussion: ordinary income, capital gains, estates, and deductions. Today, we will discuss the second major topic: capital gains.
So, what does Biden propose to change for capital gains? We see this primarily in two areas:
1. For income over $1 million :
Capital gains
Long-term capital gains and qualified dividends over $1 million would be taxed at ordinary rates instead of capital gains rates. This effectively increases the from 23.8% to 43.4%, a change, being over an 80% increase.
Note: The “actual” capital gains rate for over $1 million would change from 20% to 39.6%., and then a 3.8% net investment income tax would be added to each, which to any investment income over $200,000 (single) or $250,000 (married).
2. For income over $400,000 :
1031 Exchanges.
The 1031 like-kind exchange would be eliminated for those with income above $400,000. As many readers know, this 1031 exchange is a common strategy used by many real estate investors allowing one to defer taxes when proceeds are invested in like-kind property.
What Can We Do About This?
For those with income above these limits, here are a few options that may help lower taxable income:
- Hold securities/property for longer to stay under the $1 million or $400,000 threshold. This is the most obvious and simplest option, and it is important to see this as a balancing act between paying tax and optimizing investment performance. But with higher taxes means there is a higher incentive to hold rather than selling.
- Use installment sales to regulate income. This applies mainly to business owners and real estate investors, which could spread out income over multiple years.
- Opportunity zones. These are qualified funds that invest in designated underserved communities, and capital gains can be deferred when investing in one of these funds. This is still very much in its infancy (only three years old), so while it is not a tried-and-true method, it has been growing in popularity.
That leads us to our next topic. . . how long can you (or should you) hold an investment and defer a capital gain? And with estates, will there still be a step-up in basis to minimize a beneficiary’s gain? We will discuss in the coming weeks.
