Our guest author for this article is Brandon Hall, CEO of The Real Estate CPA, a CPA firm specializing in tax and accounting services for real estate investors.
The 2020 election season is upon us, along with meaningful implications for real estate investors when it comes to tax deductions and strategy. As a professional accountant focused on helping real estate investors specifically, I’ve pulled together each nominees’ comments and position on taxes to date — with a breakdown of how changes in tax laws could affect you for the next four years and beyond.
Joe Biden: The Democrat Nominee’s Take on Taxes (For Real Estate Investors)
Former Vice President Joe Biden dropped a high-level summary of his tax proposals a few weeks ago. Here is a summary of each.
Top rate on ordinary income. Biden proposes increasing the current top tax rate of 37% to 39.6%. This will affect taxpayers who are single earning more than $520,000 per year, and married taxpayers earning more than $620,000 per year.
Long-term capital gains. Biden plans to increase the tax rate for long-term capital gains from 20% to 39.6% for taxpayers earning more than $1 million per year.
Payroll taxes. Currently, you pay Social Security (6.2%) and Medicare (1.45%) taxes on wages earned up to $137,700. Any wages in excess are only subject to Medicare taxes. Biden’s plan will add Social Security taxes back to wages earned once they reach $400,000. If you earn $450,000, you’ll see the Social Security and Medicare tax on your first $137,700 in earnings, just the Medicare tax of 1.45% on your earnings between $137,700 and $399,999, and then Social Security will come back in on that last $50,000 ($400,000 – $450,000).
Itemized deductions. Biden will reinstate the Pease Limitations which phases out itemized deductions for those earning more than $400,000 per year.
Stepped-up basis. Biden proposes to eliminate stepped-up basis at death. This means heirs will inherit the deceased taxpayer’s adjusted basis and will be subject to capital gain tax when the asset is sold.
1031 exchanges. Biden has discussed repealing 1031 exchanges to fund new tax cuts and credits for child and elderly care.
Tax cuts. Biden will implement a handful of tax cuts and credits aimed at low-income households and small businesses. Those include a credit for small businesses providing retirement plans to employees, a credit of $15,000 for first-time homebuyers, a renter’s credit to reduce rent and utility expense, an expansion of the earned income and premium tax credit, and a credit for parents with childcare.
Donald Trump: The President’s Tax Plan for Real Estate Investors
Now let’s take a look at proposals and statements that the current president and Republican Donald Trump has made on tax-related issues. His tax proposals are lacking in detail, so this limits our ability to help you understand how they may impact your wallet.
He has also made statements on various tax changes throughout 2020 and some have changed. Below we break down what we can, along with the campaign proposals. See the proposals here.
Payroll taxes. Currently, you pay Social Security (6.2%) and Medicare (1.45%) taxes on wages earned up to $137,700. Any wages in excess are only subject to Medicare taxes. President Trump signed an executive order that defers collection of the tax. However, and this is extremely important, this is not a payroll tax cut. You will still owe these deferred payroll taxes in 2021. President Trump has stated that he will push to forgive these payroll tax deferrals if re-elected.
Income taxes. The Trump administration has hinted that the election-year tax plan will include a tax cut for the middle class. This has yet to materialize into any formal proposal.
Long-term capital gains. President Trump has mentioned the idea of reducing long-term capital gains from 20% to 15% and indexing capital gains to inflation. However, there are not additional details on this reduction at this time.
2017 TCJA. President Trump administration has indicated that they will push to make some provisions of the 2017 TCJA permanent if re-elected. There have been no formal proposals and his campaign documents lack a plan for expiring tax provisions.
“Made in America” Tax Credits. President Trump has proposed an unspecified tax credit presumably for companies that produce products in America. There are no additional details at this time.
Expand Opportunity Zones. Opportunity zones allow investors to defer tax on their capital gains by investing in Qualified Opportunity Funds. President Trump proposes to expand Opportunity Zones in his campaign announcement, however there are no details on what this may mean.
Keep jobs in America + Tariffs. President Trump’s campaign proposal suggests that tax cuts will be made available to employers who keep jobs in America. The president has indicated in previous statements that he would impose tariffs on companies that do not move jobs back to the United States. There are currently no additional details on this proposal.
Guest author Brandon Hall is CEO of The Real Estate CPA, a CPA firm specializing in tax and accounting services for real estate investors. He leads a team of 17 advisors providing services to over 550 real estate investors, syndicates, and funds across the United States. Before launching The Real Estate CPA, Brandon spent time at PricewaterhouseCoopers and Ernst & Young. Brandon is a national speaker, has been a guest on 30+ podcasts, and invests in multi-family real estate.